(20 pt) Consider a portfolio P which consists of two securities S and s2. Let r...
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(20 pt) Consider a portfolio P which consists of two securities S₁ and s2. Let r₁ and r2 be the random variables that represent the rate of return of S₁ and S2, respectively. Let 1 - a be the weight of S₁ and a that of S₂. Keep the notations Ti, oi (i = 1,2), 012 = Cov (r1, 72), 12 = corr (r₁, r2) as usual. It can be proved that (0,7) is part of hyperbola p= 0102 (T - b)² C 02 (a√c)² In other words, o = a√(r-b)² + c for some a, b, c > 0. Find a, b, and c. = 1. (20 pt) Consider a portfolio P which consists of two securities S₁ and s2. Let r₁ and r2 be the random variables that represent the rate of return of S₁ and S2, respectively. Let 1 - a be the weight of S₁ and a that of S₂. Keep the notations Ti, oi (i = 1,2), 012 = Cov (r1, 72), 12 = corr (r₁, r2) as usual. It can be proved that (0,7) is part of hyperbola p= 0102 (T - b)² C 02 (a√c)² In other words, o = a√(r-b)² + c for some a, b, c > 0. Find a, b, and c. = 1.
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The portfolio return is given byrP 1 ar1 ar2 The expected return of the portfolio isEr... View the full answer
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