Return to the example presented in Problem 1 Chapter 4 A
Return to the example presented in Problem 1, Chapter 4.
A. Assuming short selling is not allowed:
(1) For securities 1 and 2, find the composition, standard deviation, and expected return of the portfolio that has minimum risk.
(2) On the same graph, plot the expected return and standard deviation for all possible combinations of securities 1 and 2.
(3) Assuming that investors prefer more to less and are risk avoiders, indicate in red those sections of the diagram in Part 2 that are efficient.
(4) Repeat steps 1, 2, and 3 for all other possible pair wise combinations of the securities shown in Problem 1 of Chapter 4.
B. Assuming short selling is allowed:
(1) For securities 1 and 2, find the composition, standard deviation, and expected return of the portfolio that has minimum risk.
(2) On the same graph, plot the expected return and standard deviation for all possible combinations of securities 1 and 2.
(3) Assuming that investors prefer more to less and are risk avoiders, indicate in red those sections of the diagram in Part 2 that are efficient.
(4) Repeat steps 1, 2, and 3 for all other possible pair wise combinations of the securities shown in Problem 1 of Chapter 4.
C. Assuming that the riskless lending and borrowing rate is 5%, and short sales are allowed, find the location of the optimal portfolio from among those considered.
Repeat for a rate of 8%.
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