You have just applied the knowledge of efficient frontier and portfolio optimization in

managing a pure equity portfolio in Steps 3 and 4. In real life, many investment strategies
utilize other assets or a mix of several, including fixed income, money market funds,
commodities, foreign currencies, and even real estates. For instance, among the largest 25
mutual funds, close to half invest in assets other than equity.
Using the same set of knowledge on portfolio diversification, you are now required to plan
for an investment portfolio of $5 million. Your mandate allows you to invest in the following
investment vehicles: Vanguard Total Bond Market Index Fund (ticker: VBTLX) and
Vanguard 500 Index (ticker: VFIAX). These two funds represent investment vehicles in fixed
income and equity, respectively.
Your data set for this part of the project includes the monthly prices for AAPL provided in
the "Historical Stock Data" link in Module 1, as well as the historical monthly returns data for
VBTLX and VFIAX from January 2012 to July 2016.
You are encouraged to practice retrieving and inputting the VBTLX and VFIAX returns data
by:
a. Going to MorningStar's website: http://www.morningstar.com/
b. Searching in the "Quote" box for fund performances using the ticker given, then click on
the "Performance" tab to find the monthly total returns at the bottom of the page.
c. Copying historical monthly returns data from January 2012 to July 2016 in a spreadsheet
(NOTE: The returns are percentages but are presented without a percentage sign, so make
sure that when entering them into your spreadsheet they are treated as percentages).
If you'd prefer to skip this step, the monthly returns can be downloaded here.
5.1 Your goal is to again design a portfolio allocation that represents a "optimal risky
portfolio" on the efficient frontier. How much of the $5 million would you invest in each of the
two funds as of the end of December 2015?
5.2 Assume you keep the portfolio weights fixed as of the end of the December 2015.
Calculate your portfolio monthly return for the period January 2016 through the end of July
2016.
5.3 In light of the calculations in Steps 5.1 and 5.2, as well as what you've learned more
generally about portfolio diversification and risk, consider this question: how does the
monthly performance of your portfolio of a mixed asset class of funds compare to the single
security AAPL?

Question :

No. 1
Refer to Step 5.1. Calculate the weights of VBTLX and VFIAX that achieve a portfolio
allocation that represents an "optimal risky portfolio" on the efficient frontier, as of the end of
December 2015. Given these weights, how much of the $5 million would you invest
in VBTLX?
Answer rounded to the nearest whole dollar, with no dollar sign ("$") and no commas (e.g.,
you would write "$2,000,000" as "2000000").

No. 2
Refer to Step 5.2. What is the portfolio's return in January 2016?

No. 3
Refer to Step 5.2. What is the portfolio's return in July 2016?
No. 4
For the period of January 2016 through July 2016, compare the percentage returns of a
portfolio comprised of VBTLX and VFIAX, weighted as in Question 1, and a portfolio
consisting of the single security AAPL. Which of the following statements is true as to this
comparison (check all that apply)?

A. The return of AAPL is greater in July 2016 than for the weighted portfolio of VBTLX and
VFIAX
B. There is no month in which AAPL and the weighted portfolio of VBTLX and VFIAX both
yielded negative returns
C. The returns of AAPL have more variance from zero than the returns for the weighted
portfolio of VBTLX and VFIAX
D. AAPL has the highest return in a single month, while the weighted portfolio of VBTLX
and VFIAX has the lowest return in a single month

No. 5
Refer again to Steps 5.1 and 5.2. As of the end of December 2015, you invest $5 million in
a portfolio of VBTLX and VFIAX, allocating your investment according to the weights found
in Question 1.
Based on the monthly returns of VBTLX and VFIAX in January 2016-July 2016, and
keeping the weights fixed, what is the value of the $5 million investment as of the end of
July 2016?
Answer rounded to the nearest whole dollar, with no dollar sign ("$") and no commas (e.g.,
you would write "$2,000,000" as "2000000").