There are only two risky assets (stocks) A and B in the market. Mean 20% B...

 

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There are only two risky assets (stocks) A and B in the market. Mean 20% B 10% The returns on the two assets have zero correlation. A Standard Deviation 10% 5% A. Assume that there is no risk-free asset. (i) Plot (sketch) the efficiency frontier (the investment opportunity set). (ii) What is the expected return and the standard deviation of the minimum-variance-portfolio? (iii) An investor would like to construct a portfolio that has a standard deviation of 8%. A consultant suggest the following portfolio: WA = -0.393, WB = 1.393. Is this a good suggestion? Explain. B. Now assume that there is a risk free asset. The risk-free rate (for borrowing and for lending) is 4%. The expected return of the market portfolio (= tangency portfolio, optimal risky portfolio) is 14%. (0) What is the standard deviation of the market portfolio? Plot (sketch) the efficiency frontier (the optimal investment opportunity set). (iii) What is the minimal standard deviation of a portfolio that has expected return of 12%? (iv) What is the minimal standard deviation of a portfolio that has expected return of 18% ? C. [harder] Now, assume that the regulator legislates that borrowing at the risk-free rate is completely forbidden (lending is allowed). (0) What is the minimal standard deviation of a portfolio that has expected return of 12%? What is the minimal standard deviation of a portfolio that has expected return of 18%? There are only two risky assets (stocks) A and B in the market. Mean 20% B 10% The returns on the two assets have zero correlation. A Standard Deviation 10% 5% A. Assume that there is no risk-free asset. (i) Plot (sketch) the efficiency frontier (the investment opportunity set). (ii) What is the expected return and the standard deviation of the minimum-variance-portfolio? (iii) An investor would like to construct a portfolio that has a standard deviation of 8%. A consultant suggest the following portfolio: WA = -0.393, WB = 1.393. Is this a good suggestion? Explain. B. Now assume that there is a risk free asset. The risk-free rate (for borrowing and for lending) is 4%. The expected return of the market portfolio (= tangency portfolio, optimal risky portfolio) is 14%. (0) What is the standard deviation of the market portfolio? Plot (sketch) the efficiency frontier (the optimal investment opportunity set). (iii) What is the minimal standard deviation of a portfolio that has expected return of 12%? (iv) What is the minimal standard deviation of a portfolio that has expected return of 18% ? C. [harder] Now, assume that the regulator legislates that borrowing at the risk-free rate is completely forbidden (lending is allowed). (0) What is the minimal standard deviation of a portfolio that has expected return of 12%? What is the minimal standard deviation of a portfolio that has expected return of 18%?

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Expected Return of Stock AR1 20 Expected Return of Stock YR2 10 S1Standard Deviation of Stock A 1000 ... View the full answer