CAS Exam 9 Spring 2016, Question 3
Study guide: Exam 9
The table below describes the assets available to the investor. All assets are uncorrelated.
| Asset | Expected Return | Standard Deviation |
|---|---|---|
| A | 10% | 25% |
| B | 10% | 25% |
| C | 10% | 25% |
| D | 2% | 0% |
The table below describes two different portfolio investment options available to the investor:
| Asset | Portfolio 1 Weights | Portfolio 2 Weights |
|---|---|---|
| A | 30% | 30% |
| B | 0% | 30% |
| C | 0% | 30% |
| D | 70% | 10% |
Part a (1 point)
Define risk pooling and risk sharing. Provide an example of how each is achieved in the insurance industry.
Part b (1.5 points)
Calculate each portfolio's expected return, variance and Sharpe ratio.
Part c (0.5 points)
An investor currently holds Portfolio 1 and is considering moving all investments from Portfolio 1 into Portfolio 2. Explain how this will affect the investor's overall risk.
Part d (1.5 points)
Construct a portfolio that would give the investor the same expected return as Portfolio 1 and the same Sharpe ratio as Portfolio 2. Briefly explain how this will affect the investor's overall risk.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution