Ans. 5.3) from the graph prepared to present IBM, it can be said that, IBM is generating annual returns of 15%, at the same time IBM has a high standard deviation of around 32%. Now if IBM investment volatile with 32% then IBM will get a return of around 10.2%. Which is (15%/32%) -1 = around 53% reduction in return if the investment got riskier and deviates from its plan. Where as in contract VIP’s Investment plan is less risky, as if their Investment Plan deviates from the expectation they will (8.84%/15.11%) -1 = lose around 41.50% of the expected return which is far better than the IBM’s Investment in Stock.
Ans. 5.4) from the graph prepared to present IBM, it can be said that, IBM is generating annual returns of 15%, at the same time IBM has a high standard deviation of around 32%. Now if IBM investment volatile with 32% than IBM will get a return of around 10.2%. Which is (15%/32%) -1 = around 53% reduction in return if the investment got riskier and deviates from its plan. Where as in contract VIP’s Investment plan is less risky, as if their Investment Plan deviates from the expectation they will (8.88%/14%) -1 = lose around 37% of the expected return which is far better than the IBM’s Investment in Stock.
Ans. 6)After the economist's suggestion the effect reducing return rates on S&P 500 and on the MSCI World to 5% and 6.5%, and by making changes to correlation b/w above two classes. The return expected to generate at 10% standard deviation is 6.4%, where the weighted mix to Invest in at MSCI is 66% and at Lehman Brothers 34%. Since upon volatility this mix will maximum generate (6.4% x 10%) -6.4% = 5.76%, which is to change the standard deviation of return hit, by (6.4%/10%) -1 = 36%, which in contrast to IBM is less and make sense as there are always chances of any change which VIP can’t control and should be considered in making such plan.
Ans. 6)After the economist's suggestion the effect reducing return rates on S&P 500 and on the MSCI World to 5% and 6.5%, and by making changes to correlation b/w above two classes. The return expected to generate at 10% standard deviation is 6.4%, where the weighted mix to Invest in at MSCI is 66% and at Lehman Brothers 34%. Since upon volatility this mix will maximum generate (6.4% x 10%) -6.4% = 5.76%, which is to change the standard deviation of return hit by (6.4%/10%) -1 = 36%, which in contrast to IBM is less and make sense as there are always chances of any change which VIP can’t control and should be considered in making such plan.
Ans. 7a)the allocation VIP would get after such economic effect that it will hit the mix of Investment and Investment structure will change. On the other hand, some uncertainty will arise due to the downward trend of Bonds and International Equity. After the economic downturn and reflect decrease on Average Annual Return, the investment plan will generate an average annual return of 7.9% of target standard deviation of 10% and the Investment mix will be the 66% of MSCI World and 34% of Lehman Brothers
Ans. 7b) the investment plan will generate an average annual return of 7.2% of target standard deviation of 6% and the Investment mix will consist 23% of S&P 500, 38% of MSCI World and 39% of Lehman Brothers
Ans. 7c) the investment plan will generate an average annual return of 6.1% of target standard deviation of 2% and the Investment mix will consist 64% of S&P 500, 2% of MSCI World and 34% of Lehman Brothers..............................
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