A bank has a one-year liability of $10 million at an interest rate of 3% per annum.
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A bank has a one-year liability of $10 million at an interest rate of 3% per annum. It wants to invest this money in a mix of two assets: Asset A and Asset B. Asset A is expected to have a return of 6% per annum and Asset B is expected to have a return of 10% per annum. The bank's goal is to minimize the risk of its investment while ensuring that it can meet its liability obligation at the end of the year. The correlation coefficient between the returns of the two assets is 0.5. Determine the allocation between Asset A and Asset B that minimizes the variance of the bank's investment
Related Book For
Fundamentals of Corporate Finance
ISBN: 978-1259024962
6th Canadian edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus, Devashis Mitra, Elizabeth Maynes, William Lim
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