(25pts) Consider two risky assets A and B and your investment time horizon is 1 year....

  

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(25pts) Consider two risky assets A and B and your investment time horizon is 1 year. Your forecasts for their annual expected return and standard deviation are presented in the following table. You estimate their correlation would be 0.5. The risk-free rate is 2% per year and the market risk premium is 6% per year. Asset A B Expected Return 10% 20% Standard Deviation 12% 30% (1) (8pts) Find out the portfolio formed by A and B that has the highest Sharpe ratio. You need to give the weights of each asset and the value of the portfolio's expected return and standard deviation. (2) (5pts) Suppose your risk-aversion index is 5. How do you allocate your investment among the risk-free asset, A and B? (3) (5pts) Find out BA and BB. (4) (7pts) Suppose you invest $1 million in the portfolio that you found in (2). How do you hedge the stock market risk using S&P500 index futures contracts that mature in one year? Specify which position you will take and the number of futures contracts (round to the nearest integer). The current 1-year futures price for S&P500 is 2500 and the value of a single futures contract is 250 times the futures price. (25pts) Consider two risky assets A and B and your investment time horizon is 1 year. Your forecasts for their annual expected return and standard deviation are presented in the following table. You estimate their correlation would be 0.5. The risk-free rate is 2% per year and the market risk premium is 6% per year. Asset A B Expected Return 10% 20% Standard Deviation 12% 30% (1) (8pts) Find out the portfolio formed by A and B that has the highest Sharpe ratio. You need to give the weights of each asset and the value of the portfolio's expected return and standard deviation. (2) (5pts) Suppose your risk-aversion index is 5. How do you allocate your investment among the risk-free asset, A and B? (3) (5pts) Find out BA and BB. (4) (7pts) Suppose you invest $1 million in the portfolio that you found in (2). How do you hedge the stock market risk using S&P500 index futures contracts that mature in one year? Specify which position you will take and the number of futures contracts (round to the nearest integer). The current 1-year futures price for S&P500 is 2500 and the value of a single futures contract is 250 times the futures price.

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Answer 1 8pts Find out the portfolio formed by A and B that has the highest Sharpe ratio You need to give the weights of each asset and the value of the portfolios expected return and standard deviati... View the full answer