Week Two-The Portfolio Perspective
Assignment One
1.
2.
3. Based on the analysis above, the two mutual fund positions hold a .55 positive
correlation, this positive correlation, and lack of perfect correlation, help diversify our
portfolio risk. As stand alone investments these two mutual funds carry significant risk,
and as such, it is necessary to optimize our levels of risk with an appropriate allocation.
According to the table and the graph, we minimize risk if we hold approximately 60% of
MDLTX (low risk asset) and 40% of EKWAX (high risk asset). This is clearly superior to
holding everything in either fund from a risk reduction standpoint. This means that any
portfolio built with these two investment vehicles should have at least 40% of EKWAX as
it provides the optimal volatility for each given level of risk. As we increase of exposure to
EKWAX our return improves however our level of risk increase significantly. We can
clearly see this given the standard deviation and expected returns in our respective
investments and allocations. With our proposed allocations, we receive over an 8.7%
return with a standard deviation of 23.7% (minimum risk portfolio) which provides with
slightly lower volatility than each stand alone investment as well as market participation,
as our MDLTX could only muster a 5.5% return and EKWAX over 13.8%.
4. We can also look past the above-referenced tables and graphs and look at these funds
from a trop down approach. Latin America would be considered a developed/emerging