1. Suppose that you have the opportunity to buy stock in AT&T and Microsoft. Mean Variance...

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1. Suppose that you have the opportunity to buy stock in AT&T and Microsoft. Mean Variance (a) What is the expected return of a portfolio whose weight on AT&T is 0.6 and weight on Microsoft is 0.4? AT&T Microsoft 0.15 0.18 0.015 0.035 (b) Assume the correlation between the two stocks is 0.6. What is the variance of the portfolio ? (c) Now assume that the correlation between AT&T and Microsoft is -1. Find the weights of the two stocks that produce a minimum risk portfolio. What is the variance of this portfolio? 2. Consider a standard portfolio choice problem with two risky assets: equity and risky bond. Their expected returns, standard deviations, and the correlation co- efficient are given by E(r) O p(corr) bond equity 8% 13% 12% 20% 0.3 a) Suppose the risk-free interest rate is 5%, find the tangency portfolio. b) Given the 5% risk-free interest rate and the utility function of an investor E(re)-0.005 Ao2, where A = 5, 1 what are the investor's optimal portfolio weights on the equity and risky bond? c) Suppose the risk-free interest rate is 6%, find the tangency portfolio. d) Suppose the risk-free saving rate is 5% and the risk-free borrowing rate is 6%. Find the optimal portfolio weights of equity, risky bond, and safe asset for an investor with A = 2. 3. Discuss whether each of the following statements is true or false and WHY. a) The Capital Asset Pricing Model implies that the required rate of return for a company should never be the risk-free return b) The return of a well-diversified portfolio in Arbitrage Pricing Theory is risk-free due to the risk diversification. 1. Suppose that you have the opportunity to buy stock in AT&T and Microsoft. Mean Variance (a) What is the expected return of a portfolio whose weight on AT&T is 0.6 and weight on Microsoft is 0.4? AT&T Microsoft 0.15 0.18 0.015 0.035 (b) Assume the correlation between the two stocks is 0.6. What is the variance of the portfolio ? (c) Now assume that the correlation between AT&T and Microsoft is -1. Find the weights of the two stocks that produce a minimum risk portfolio. What is the variance of this portfolio? 2. Consider a standard portfolio choice problem with two risky assets: equity and risky bond. Their expected returns, standard deviations, and the correlation co- efficient are given by E(r) O p(corr) bond equity 8% 13% 12% 20% 0.3 a) Suppose the risk-free interest rate is 5%, find the tangency portfolio. b) Given the 5% risk-free interest rate and the utility function of an investor E(re)-0.005 Ao2, where A = 5, 1 what are the investor's optimal portfolio weights on the equity and risky bond? c) Suppose the risk-free interest rate is 6%, find the tangency portfolio. d) Suppose the risk-free saving rate is 5% and the risk-free borrowing rate is 6%. Find the optimal portfolio weights of equity, risky bond, and safe asset for an investor with A = 2. 3. Discuss whether each of the following statements is true or false and WHY. a) The Capital Asset Pricing Model implies that the required rate of return for a company should never be the risk-free return b) The return of a well-diversified portfolio in Arbitrage Pricing Theory is risk-free due to the risk diversification.

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1a Portfolio expected return Weight of ATT ERATT Weight of Microsoft ERMicrosoft 06 015 04 018 009 0... View the full answer