Investment Paper Polyu

Case Discussion

The State of South Carolina Pension Fund

Question 1

Question 2

Question 3

The monthly mean return of Dow 30 stocks was less than all asset classes. Additionally, Dow 30 stocks had a higher standard deviation than all asset classes. However, when returns are compounded, the mean returns are similar. The higher standard deviations of Dow 30 stocks are consistent with individual stocks being more risky than other asset classes and portfolios.

Question 4

(a) Exxon & General Electric Portfolio

Average Monthly Portfolio Return = 1.76%

Average 2-Stock Standard Deviation = 4.66%​

Portfolio Standard Deviation = 3.95%

(b) General Electric & General Motors Portfolio

Average Monthly Return = 1.58%

Average 2-Stock Standard Deviation = 6.64%

Portfolio Standard Deviation = 5.46%

(c) 5 Stock Portfolio

Average Monthly Return = 1.22%

Average 2-Stock Standard Deviation = 7.61%

Portfolio Standard Deviation = 4.85%

10 Stock Portfolio

Average Monthly Return = 1.45%

Average 2-Stock Standard Deviation = 6.73%

Portfolio Standard Deviation = 3.76%

30 Stock Portfolio

Average Monthly Return = 1.46%

Average 2-Stock Standard Deviation = 7.13%

Portfolio Standard Deviation = 3.88%

(d) As the number of stocks in the portfolio increases, the standard deviation tends to decrease. While this decrease is not constant as stocks with high standard deviations are added, non-systemic risk generally decreases as all stocks have a correlation of less than 1. The portfolio standard deviation is significantly less than the average standard deviation due to the benefits of diversification.

Question 5

Most of the stocks' returns are higher than bonds' returns and in turn these stocks have higher volatility than bonds.

Although some countries' assets are more risky than other countries' assets, it does not mean that those assets have higher expected returns....