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Finance 407: Multinational Financial Management
1
Topic #19: Global Portfolio optimization
L. Gattis
The Pennsylvania State University
Review
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You plan to retire in 40 years and want to earn an annuity of $100,000 for 30 years that starts in 41 years. How much do you need to save each year (starting in on year) to have enough to buy your desired annuity? Assume a portfolio return of 6%. Hint: 1st compute how much you’ll need at retirement (PV), then compute how much you need to save annually (PMT)?
A. $7,207
B. $8,894
C. $9,120
D. $10,155
E. $11,213
Learning Objectives
3
Learning Objectives
Students understand and can recall
The process of portfolio construction and optimization
Students can compute
Nasset portfolio mean, volatility, and Sharpe ratios
Optimal combined portfolios that combine risky and riskfree assets
Global Portfolio
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Suppose we would like create a portfolio that combines U.S., EAFE, and EM equity funds using the following data.
ExpectedReturnsandVolatility CorrelationMatrix
Standard
Deviation
Expected
Return
Global
Weights US EAFE EM
US 16.0% EAFE 17.0%
EM 20.0%
9.0% 50.0% US 9.5% 40.0% EAFE
10.0% 10.0% EM
100.0%
1.00 0.60 0.50 0.60 1.00 0.50
0.50 0.50 1.00
Expected Return for a portfolio with N assets
Expected rate of return of the portfolio:
E rp N wE ri i 1
i=1 to N wiri
1 w1r1
2 w2r2
Sum= w1r1+w2r2
...
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