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Old 02-20-2013, 10:30 AM  
La literatura La literatura is offline
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Smart People: Help me do math homework

How would a person begin to answer this problem?

Quote:
What mix or set of mixes of these individual assets will provide a 6.5% return?

Name
Expected Return
Holding 1
8.50%
Holding 2
9.20%
Holding 3
3.10%
Holding 4
4.80%
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Old 02-20-2013, 03:02 PM   #31
Dayze Dayze is offline
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The answer you're looking for is:
Nicaragua
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Old 02-20-2013, 03:11 PM   #32
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The answer is:

on Near RT Zip- Lucky 860 H Shoot Swing "zorro", your first progression is H, followed by Z and Y. If M OL, X is first read.
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Old 02-20-2013, 03:18 PM   #33
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Old 02-20-2013, 03:19 PM   #34
La literatura La literatura is offline
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Originally Posted by Thig Lyfe View Post
Just write "CASH RULES EVERYTHING AROUND ME CREAM GET THE MONEY DOLLAR DOLLAR BILL Y'AAAALLLLLL"
Cak'n padna?
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Old 02-20-2013, 03:37 PM   #35
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Old 02-20-2013, 03:45 PM   #36
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Old 02-20-2013, 06:56 PM   #37
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La l,

I had to rush off this afternoon before I could really finish some details. Hope it makes more sense now. The solution I gave you is just one of many, but it will work for any amout of money that you would choose to invest.
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Old 02-20-2013, 07:11 PM   #38
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Old 02-20-2013, 07:14 PM   #39
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This is a stupid problem. Why would you want less than the maximum expected rate of return?

Now a more interesting question would be to develop a portfolio that maximizes the rate of return while mitigating risk. To properly answer this question we would need to know the uncertainty or expected variance of each of the investments. Also, we need to know the extent to which the various holdings are correlated with one another. We could then present various portfolios match the career stage and risk tolerance of an individual investor. Do you have a problem like that?
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Old 02-20-2013, 07:17 PM   #40
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Quote:
Originally Posted by cdcox View Post
This is a stupid problem. Why would you want less than the maximum expected rate of return?

Now a more interesting question would be to develop a portfolio that maximizes the rate of return while mitigating risk. To properly answer this question we would need to know the uncertainty or expected variance of each of the investments. Also, we need to know the extent to which the various holdings are correlated with one another. We could then present various portfolios match the career stage and risk tolerance of an individual investor. Do you have a problem like that?
You somewhat answered your own question: the risk necessary to earn a greater expected return may be too high for an investor. That is why, with the other information you mentioned, one would find the efficient frontier and invest at the defined level of risk. I'm certain whatever class this is for they are building up to that analysis.
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Old 02-20-2013, 07:23 PM   #41
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Quote:
Originally Posted by DaKCMan AP View Post
You somewhat answered your own question: the risk necessary to earn a greater expected return may be too high for an investor. That is why, with the other information you mentioned, one would find the efficient frontier and invest at the defined level of risk. I'm certain whatever class this is for they are building up to that analysis.
Knowing La Lit, I'm pretty sure its not. He's a word geek, not a numbers geek.
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Old 02-20-2013, 07:25 PM   #42
DaKCMan AP DaKCMan AP is offline
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Originally Posted by cdcox View Post
Knowing La Lit, I'm pretty sure its not. He's a word geek, not a numbers geek.
Then I agree that it's a pointless assignment.
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Old 02-20-2013, 07:28 PM   #43
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Quote:
Originally Posted by La literatura View Post
Mostly I'm trying to figure out how you came up with that answer, and how I can come up with other answers.
not 100% certain, but I think he used math.
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Old 02-20-2013, 07:38 PM   #44
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Originally Posted by Saul Good View Post
You're making this too hard. You don't have to blend all four. It's a lot easier to blend 2 and put it into a simple algebraic equation.

For example, you can use holdings 1 (x) and 3 (y).

x(8.5) + y(3.1) = 6.5% is your equation.

Now, you have to express x in terms of y. Because x+y= 100% (1.00) of your investment, x=1.00-y

Now, you re-write the equation with only the y variable:

(1-y)(8.5)+y(3.1)=6.5

Do the multiplication:

8.5-8.5y+3.1y=6.5

Simplify further

8.5-5.4y=6.5

Subtract 6.5 from both sides of the equation

2-5.4y=0

Add 5.4y to both sides

2=5.4y

Divide both sides by 5.4 to solve for y

.37=y

37% of your investment should be in y. The rest (1-y) should be in x.

Check your work: .37(.031)+.63(.085)=.065
That's all good if he is allowed to only use 2 of the 4 options. But if he is required to use all 4 of the percentages listed, he better go with something like along the lines I provided for him.

EDIT: We are essentially doing the same thing... I just eliminated 2 of the options by giving each a 25% value. Didn't mean to come across as my way was better Saul Good! Hope you didn't take it that way.

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Old 02-20-2013, 08:28 PM   #45
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Quote:
Originally Posted by DaKCMan AP View Post
You somewhat answered your own question: the risk necessary to earn a greater expected return may be too high for an investor. That is why, with the other information you mentioned, one would find the efficient frontier and invest at the defined level of risk. I'm certain whatever class this is for they are building up to that analysis.
Ugh efficient frontier is such a flawed concept. They finally dropped it from the CFA curriculum.

Not saying your wrong, just nitpicking about my least favorite part of portfolio management theory in modern finance.
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