As an investment advisor for MREAF (Momentum Real Estate Advisory Fund), you are about to make a presentation to the portfolio manager of the ET&T pension fund. You would like to show what would have happened had ET&T made an investment in MREAF during the last 13 quarters. The ET&T manager has provided you with historical data on the performance of its portfolio, which is made up entirely of common stock. Historical data for the ET&T portfolio and MREAF are as follows:
|
Period Ending
|
ET&T
Common Stock Fund
|
MREAF
Real Estate Fund
|
|
Unit
Value
|
Quarterly
Dividend
|
Unit
Value
|
Quarterly
Dividend
|
|
Quarter
|
|
|
|
|
|
1
|
$ 701.00
|
$ 8.28
|
$ 70.00
|
$2.17
|
|
2
|
752.50
|
8.11
|
80.05
|
2.14
|
|
3
|
850.52
|
10.30
|
90.80
|
2.01
|
|
4
|
953.75
|
9.81
|
100.50
|
2.01
|
|
5
|
1,047.57
|
12.05
|
99.14
|
1.87
|
|
6
|
1,221.70
|
14.17
|
95.50
|
1.81
|
|
7
|
1,443.90
|
17.18
|
93.77
|
1.79
|
|
8
|
1,263.31
|
14.91
|
80.31
|
1.54
|
|
9
|
1,258.56
|
13.84
|
77.34
|
1.49
|
|
10
|
1,526.72
|
18.32
|
76.53
|
1.44
|
|
11
|
1,616.81
|
19.73
|
78.42
|
1.51
|
|
12
|
1,624.08
|
19.98
|
79.01
|
1.53
|
|
13
|
1,560.25
|
18.88
|
81.75
|
1.55
|
a. Calculate the quarterly HPR for each investment.
b. Calculate the arithmetic mean HPR, the standard deviation of the HPRs, and the geometric mean for each fund. Which fund contained more risk per unit of return?
c. Was there any correlation between returns on the ET&T fund and MREAF?
d. Would a portfolio that contained equal amounts of ET&T securities and MREAF have provided any investment diversification? Why?
e. Optional. Assume each investment could have been combined in a portfolio with weights ranging from 0 percent to 100 percent. What pattern of risk and return would result if each investment were added (deleted) in increments of 10 percent (remember that the sum of the two proportions must always sum to 100 percent)? What combination of securities would have constituted the "efficient frontier" (if any)?
f. If the manager of ET&T is considering making an investment in MREAF, of what use is this analysis?