2. (15 points) An investor is considering three stocks. The characteristics of each stock are as...
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2. (15 points) An investor is considering three stocks. The characteristics of each stock are as follows. Fund Expected return Standard deviation X Y Z 8% 15% 10% 20% 14% 25% = 0.40; = -0.30. Answer the following questions. The correlation coefficients between several pairs of stocks are as follows: = 0.20; 2.1 (5 points) What are the investment proportions in the minimum-variance portfolio of these three stocks? Note that short-sale is allowed. Explain your calculation. 2.2 (5 points) If the investor expects portfolio return of 11%, how should he allocate his investments in each stock? Note that short-sale is allowed. Explain your calculation. 2.3 (5 points) If the investor has risk aversion coefficient A = 4, what would be the investment proportions of his portfolio? If the coefficient A changes to 2, how would it affect the proportions? Note that short-sale is not allowed. Explain your calculation. 2. (15 points) An investor is considering three stocks. The characteristics of each stock are as follows. Fund Expected return Standard deviation X Y Z 8% 15% 10% 20% 14% 25% = 0.40; = -0.30. Answer the following questions. The correlation coefficients between several pairs of stocks are as follows: = 0.20; 2.1 (5 points) What are the investment proportions in the minimum-variance portfolio of these three stocks? Note that short-sale is allowed. Explain your calculation. 2.2 (5 points) If the investor expects portfolio return of 11%, how should he allocate his investments in each stock? Note that short-sale is allowed. Explain your calculation. 2.3 (5 points) If the investor has risk aversion coefficient A = 4, what would be the investment proportions of his portfolio? If the coefficient A changes to 2, how would it affect the proportions? Note that short-sale is not allowed. Explain your calculation.
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