Asset Allocation and Risk Tolerance

Name______________________________

FINA 405

Asset Allocation and Risk Tolerance Worksheet

Please complete the following exercises and bring two copies to class the first night.

Exercise 1: Initial Portfolio Allocation

Part A): Assume that you have $1,000,000 to invest among the following three asset categories: U.S. equities, 30-year U.S. T-bonds, and one-year commercial bank certificates of deposit. You investment horizon is one year. Indicate below how you would allocate the money.

1. More detailed information the Standard and Poor’s (S&P) composite index is available directly from Standard & Poor’s: http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_500/2,3,2,2,0,0,0,0,0,0,0,0,0,0,0,0.html Excel spreadsheets of Index returns are available by choosing a timeframe and clicking on the tab “EXPORT” at http://us.spindices.com/indices/equity/sp-500

Web-based finance sites also customarily carry data on the S&P 500. For example, –at Yahoo! Finance: http://finance.yahoo.com/q?s=%5EGSPC –at CNNMoney.com: http://money.cnn.com/data/markets/sandp/? –At MSN: http://moneycentral.msn.com/detail/stock_quote?Symbol=$INX

2. Historical data on 30-year U.S. Treasury bond yields on debt claims are available from the Federal Reserve at http://www.federalreserve.gov/releases/h15/data.htm. For Excel-based historical daily rates on the 30-year T-bond, defined as “Market yield on U.S. Treasury securities at 30-year constant maturity, quoted on investment basis” go to

http://www.federalreserve.gov/datadownload/Output.aspx?rel=H15&series=b56abb6d9cc35f28ccf86b8a0188e948&lastObs=&from=&to=&filetype=csv&label=include&layout=seriescolumn

Long-bond Treasury rates are also available from the following sites: — http://www.reuters.com/finance/bonds — http://www.bloomberg.com/markets/rates/index.html

3. Assume the annual rate currently available on commercial bank CD is 1%.

Part B) : Identify three sources that you relied upon most heavily to assist you in your asset allocation decisions. Explain how each was useful to you in the table below.

Exercise 2: Scoring Your Risk Tolerance

1. Locate and complete the Risk Tolerance questionnaire on pp. 44-45 of the textbook.

2. Calculate your total score based on the scoring rubric on p. 46 of the textbook:

_____ points

If you scored …… you may have:

0-11: No tolerance for risk

12-33: Low tolerance for risk

34-55: Below to average tolerance for risk

56 -77: Above average tolerance for risk

78-99: High tolerance for risk

100+: Very high tolerance for risk

Please circle the type of investor the rubric suggests you may be.

Exercise 3: Asset Allocation and Risk Tolerance

In one page or 250 words relate your asset allocation in Exercise 1 to your risk tolerance score in Exercise 2. Are the two consistent? Explain.