University of South Florida Expected Return and Standard Deviation Worksheet

Suppose that you are a financial advisor at Valic and have a new customer who is one of your long-time friends. Your friend wants to invest $100,000 in mutual funds, and you promised to provide useful information for investment.

To make a case simple, assume there are only a stock fund and a bond fund available for your friend. Like other fund investing in equity, the stock fund is quite risky. Its return (see below) is very high or very low depending on the economy. The bond fund, however, shows relatively stable returns. You have historical return data for the two funds as well as data for economy conditions. Your empirical analysis provides the estimated returns in different scenarios.

Type the numbers in the spreadsheet as shown above (decimals for probabilities and raw numbers for returns). Find your best friend who is willing to be a customer for your project. First of all, you have to determine what risk your friend is willing to take as you build up a portfolio for him/her. To assess his/her risk preferences, you must obtain a risk tolerance survey. Go to the site (http://pfp.missouri.edu/research_IRTA.html (Links to an external site.)) and copy the questions. Your friend goes over the survey questions and you record his/her answer. Bring the answers and type on the site to have a risk tolerance score. Like you do in this project, financial advisors usually provide a survey to their customers and explain the customers’ risk tolerance in the next meeting.

Although your friend will invest in the funds for a long period, your answers are provided based on a one-year investment. In this homework, you provide three items: 1) your answers, 2) a report for your customer in response to the last question, and 3) a copy of survey results (the score sheet) provided when the survey is completed. Do not include your customer’s survey answers. I do not need your excel spreadsheets.