Consider a portfolio with two securities having expected returns p and 2, risks and 02,...
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Consider a portfolio with two securities having expected returns p and 2, risks ₁ and 02, and a correlation coefficient p that vanishes. To minimize this portfolio's risk-to-reward ratio, a natural quantity to minimize is: f(w) of (w) #p(w) where w is the fraction of the total investment in the security with expected return (a) (2 points) Determine an equation that any critical point of f must satisfy. What type of equation is it? (b) (3 points) Show that if solution = 2, then we obtain a linear equation for w with 02 of +0 This critical point coincides with the global minimum w we found for the two- security portfolio when minimizing the variance of with p = 0. Why are the two critical points identical? Consider a portfolio with two securities having expected returns p and 2, risks ₁ and 02, and a correlation coefficient p that vanishes. To minimize this portfolio's risk-to-reward ratio, a natural quantity to minimize is: f(w) of (w) #p(w) where w is the fraction of the total investment in the security with expected return (a) (2 points) Determine an equation that any critical point of f must satisfy. What type of equation is it? (b) (3 points) Show that if solution = 2, then we obtain a linear equation for w with 02 of +0 This critical point coincides with the global minimum w we found for the two- security portfolio when minimizing the variance of with p = 0. Why are the two critical points identical?
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Given the function fw p2w pw where w is the fraction of the total investment in the security with expected return 1 we are looking to determine the cr... View the full answer
Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba
Posted Date:
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