Question

You are presently invested in the Luther Fund, a broad based mutual fund that invests in 7. (10 pts.) stocks and other securities. The Luther Fund has an expected return of 14% and a volatility of 20%. Risk-free Treasury bills are currently offering returns of 4%. You are considering adding a precious metals fund to your current portfolio. The metals fund has an expected return of 10%, a volatility of 30%, and a correlation of-20 with the Luther Fund. Will adding the precious metals fund improve your portfolio? Why? What is the minimum volatility of the portfolio after adding the precious metals? a. b.

Answer 1

a)We can observe that the minimum volatility of the the portfolio is 14.98% while the volatility of Luther Fund alone is 20%. Hence adding the precious metal will improve the portfolio as it will decrease the volatility of the portfolio. Also, both are negatively correlated.

b) Minimum Volatility = 14.98%

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