Using all available data, both historical and forward looking, estimate the
returns, risks, and correlations for the following asset classes.
a) US Equities
b) US Long-term Treasury Bonds
c) Gold
Document your sources of data and the model(s) you used to estimate returns and correlations.
Do not rely solely on historical returns for your estimate of future returns.
2. Using your estimates from problem 1, estimate the risk and return for a portfolio that is
60% US Equities, 35% US Long-term Treasury Bonds, and 5% gold.
3. Using your estimates from problem 1, construct a portfolio with a standard deviation no
higher than 10% that has the highest expected rate of return.
4. here are numerous ETFs that provide broad exposure to the broad US equity market.
Identify at least five and make a recommendation as to which one is the best addition to a
portfolio to represent the asset class of US Equities. Some of the criteria to consider may
include:
Index represented
2
Tracking error
Expense ratio
Trading volume
Assets under management (AUM)
Portfolio turnover
Tax efficiency
Include a table showing the five or more ETFs examined with the above data.
What other criteria do you feel are important?
5. The role of “hedge assets” such as gold and commodities in portfolios is quite
controversial. Some view these as asset classes in their own right. Others dismiss them
since they do not produce income. In general, insurance has a negative expected value,
but consumers purchase it to cover catastrophic situations. If gold/commodities/bitcoin
are hedges with negative expected return, what is their role in a portfolio? In our
negative real-interest-rate environment, could equities also be a hedge asset with a
negative expected return?
Hints:
ETFs make good proxies for asset classes as far back as they go. You can get historical
correlations quickly from www.portfoliovisualizer.com.
The Grinold-Kroner model is one method of extracting expected returns from current market
prices. https://breakingdownfinance.com/finance-topics/equity-valuation/grinold-and-kroner-
model/
To see what other firms are forecasting, Google “Capital market assumptions” and you will see
what many major firms forecast. For example, see
https://www.aqr.com/Insights/Research/Alternative-Thinking/2021-Capital-Markets-
Assumptions-for-Major-Asset-Classes
There are many ETF and Mutual Fund Screeners out there. Yahoo, Google, Morningstar, and
most brokerage web sites have them. ETFdb.com has much information on ETFs and a good
screener at https://etfdb.com/screener/.
Prepare a 5 to 7-minute PowerPoint presentation to present your results to a sophisticated High
Net Worth (HNW) client. Assume that this client has already agreed to a portfolio constructed
mostly from ETFs with a standard deviation of no more than 10%. The client is keenly
interested in how you created your forecasts of future returns for various asset classes, along
