Question: 1. The expected returns and standard deviation of returns for two securities are as follows: Security Z Expected Return 8% Standard Deviation 20% Security Y

1. The expected returns and standard deviation of returns for two securities are as follows:

Security Z

Expected Return 8% Standard Deviation 20%

Security Y

18% 30%

Correlation between the returns is .25.

  1. (a) Calculate the expected return and standard deviation of the return for the fol-

    lowing portfolios:

    i. 100% in Z. ii. 75%inZand25%inY.

    iii. 50% in Z and 50% in Y. iv. 25%inZand75%inY.

  2. v. 0%inZand100%inY. vi. -25% in Z and 125% in Y.

    Feel free to use a spreadsheet for this calculation and just report the two values per portfolio.

  3. (b) Sketch the investment opportunity set with assets Z and Y.

  4. Mark the three regions in which the share in security Z is negative, between 0 and 1, and bigger than 1. Indicate the minimum variance portfolio (MVP) and the efficient frontier.

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