3 . Answer all parts of the question a . Modern portfolio theory is built on a...
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Question:
Answer all parts of the question
a Modern portfolio theory is built on a meanvariance framework. What assumptions are necessary for this framework to
be a credible working hypothesis? Are these assumptions valid? marks
b Assume now the existence of a riskless asset and of N risky assets. marks
i Represent on a graph the opportunity set and the minimum variance frontier. Identify the efficient frontier. What
is the twofund separation theorem? Why is the twofund separation theorem important?
ii Discuss the impact of short selling of both risky assets and the riskfree asset on the opportunity set, the
minimum variance frontier and the efficient frontier.
iii. What is the impact on the efficient frontier of having two different rates for borrowing and lending with the
lending rate being smaller that the borrowing rata
c Suppose that you have a risky asset that provides you with an expected return of per year with a standard deviation
of Consider a riskfree asset that provides you with a riskfree return. marks
i If you have $ and invest into the risky asset and into the riskfree asset, what is the expected
return and risk of your portfolio?
ii How much will your portfolio be worth if the realised return on the risky asset is
iii. If you cannot borrow money, what is the maximum possible expected return on your portfolio, and what is the
minimum?
iv If you are allowed to borrow money at the riskfree rate, how can you get a portfolio with an expected
return and what is the risk or standard deviation of this portfolio?
Related Book For
Principles of Corporate Finance
ISBN: 978-0077404895
10th Edition
Authors: Richard A. Brealey, Stewart C. Myers, Franklin Allen
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