You are an investor with mean-variance preferences and a risk-aversion coefficient of A. You have the...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You are an investor with mean-variance preferences and a risk-aversion coefficient of A. You have the following three investment options to choose from. The first is a growth fund, the second is a value fund, and the third is a T-bill money market fund that yields a rate of 6%. The probability distribution of the risky funds is as follows: Expected return Standard deviation 25% 8% Growth fund (S) Value fund (B) 40% 16% The correlation between the fund returns is 0.20. (a) (6 points) Determine the proportion of each asset class of the optimal risky port- folio. (b) (6 points) Suppose A = 3. Determine the proportion of each asset class in the portfolio that maximizes your expected utility. (c) (6 points) Suppose A = 3. Determine the proportion of each asset class in the portfolio that maximizes your expected utility if you're only allowed to invest in the risky funds. (d) (6 points) Suppose A = 3. For this question only, suppose that your portfolio is not allowed to have a standard deviation of more than 10%. Determine the proportion of each asset class in the portfolio that maximizes your expected utility in this case. Calculate the expected utility obtained from this portfolio. How much expected utility is lost compared to the expected utility given by the portfolio in 1b? (e) (6 points) Suppose A = 3. Determine the proportion of each asset class in the portfolio that satisfies all of the following conditions: i. it gives you the same expected utility as the portfolio found in 1c ii. it has the best Sharpe ratio possible, iii. and it has the smallest risk. (f) (6 points) Suppose that the portfolio that maximizes your expected utility has either zero or a short position in the risk-free bond. Find the maximum value that your risk-aversion coefficient A can be. You are an investor with mean-variance preferences and a risk-aversion coefficient of A. You have the following three investment options to choose from. The first is a growth fund, the second is a value fund, and the third is a T-bill money market fund that yields a rate of 6%. The probability distribution of the risky funds is as follows: Expected return Standard deviation 25% 8% Growth fund (S) Value fund (B) 40% 16% The correlation between the fund returns is 0.20. (a) (6 points) Determine the proportion of each asset class of the optimal risky port- folio. (b) (6 points) Suppose A = 3. Determine the proportion of each asset class in the portfolio that maximizes your expected utility. (c) (6 points) Suppose A = 3. Determine the proportion of each asset class in the portfolio that maximizes your expected utility if you're only allowed to invest in the risky funds. (d) (6 points) Suppose A = 3. For this question only, suppose that your portfolio is not allowed to have a standard deviation of more than 10%. Determine the proportion of each asset class in the portfolio that maximizes your expected utility in this case. Calculate the expected utility obtained from this portfolio. How much expected utility is lost compared to the expected utility given by the portfolio in 1b? (e) (6 points) Suppose A = 3. Determine the proportion of each asset class in the portfolio that satisfies all of the following conditions: i. it gives you the same expected utility as the portfolio found in 1c ii. it has the best Sharpe ratio possible, iii. and it has the smallest risk. (f) (6 points) Suppose that the portfolio that maximizes your expected utility has either zero or a short position in the risk-free bond. Find the maximum value that your risk-aversion coefficient A can be.
Expert Answer:
Answer rating: 100% (QA)
a To determine the proportion of each asset class of the optimal risky portfolio we need to calculate the optimal weights for the growth fund and the value fund using the meanvariance optimization fra... View the full answer
Related Book For
Small Business Management Entrepreneurship and Beyond
ISBN: 978-0538453141
5th edition
Authors: Timothy s. Hatten
Posted Date:
Students also viewed these finance questions
-
There are three assets, A, B and C, where A is the market portfolio and C is the risk-free asset. The return on the market has a mean of 12% and a standard deviation of 20%. The risk-free asset...
-
Necked Amber purchased a bond for $1,038.90 exactly two years ago. At that time, the bond had a maturity of five years and a coupon rate of 10% (paid semi-annually). Assuming the rates below are the...
-
Debra acquired the following new assets during 2015. Date Asset Cost April 11........Furniture.............$40,000 July 28............Trucks..................40,000 November...
-
For a child i living in a particular a school district, let voucheri be a dummy variable equal to one if a child is selected to participate in a school voucher program, and let scorei be that child's...
-
A damped torsional system is composed of a shaft and a rotor (disk). The torsional stiffness and the torsional damping constant of the shaft are given by \(k_{t}=6000 \mathrm{~N}-\mathrm{m} /...
-
For each of the following misstatements in property, plant, and equipment accounts, state an internal control that the client can implement to prevent the misstatement from occurring and a...
-
On December 1, 2023, after running out of Apple iPhones in all of its 50 Southern California stores, Metta, a district manager from Best Buy, telephones James, the regional director of sales from...
-
You and a classmate are assigned a project on which you will receive one combined grade. You each want to receive a good grade, but you also want to avoid hard work. In particular, here is the...
-
The information listed below refers to the employees of Brennan Company for the year ended December 31, 2013. The wages are separated into the quarters in which they were paid to the individual...
-
Discuss what is meant by the term stress management and available interventions for organizations and individuals.
-
Discuss the symptoms of burnout using Golembiewskis phase model.
-
Discuss why personalities, ethnicity, and gender may affect an individuals level of stress.
-
Explain how group cohesiveness is developed and sustained.
-
Discuss why people join groups and what sustains their membership.
-
1. You are given the following information regarding the operating activities of XYZ Ltd during the month of January 2023: Production during the Month (Units) 850 Sales (900 units @ Rs 250) 2,25,000...
-
The bookkeeper for Riley, Inc., made the following errors: a. A cash purchase of supplies of $357 was recorded as a debit to Supplies for $375 and a credit to Cash of $375. b. A cash sale of $3,154...
-
What types of small businesses would benefit from having ISO 9000 certification?
-
You need to write a business plan for a start-up business. How do you come up with the numbers for your pro forma financial statements? Do you just guess and make them up?
-
What purpose do GAAP and FASB serve for a small business owner?
-
The following are types of active surveillance except a. National household surveys gathering information on the social status and health status of people in a particular country b. Notifcation of...
-
What can be used for a velocity output without the negative aspects of a seismic transducer?
-
More and more Japanese companies are moving in on what once was an exclusive U.S. preserve: making and selling the complex equipment that makes semiconductors. World sales are between \($3\) billion...
Study smarter with the SolutionInn App