A portfolio is created out of three risky assets with expected returns 7 = 4,7 =...

Transcribed Image Text:

A portfolio is created out of three risky assets with expected returns 7₁ = 4,7₂ = 2 and 73 = 5. Moreover assume that their variances are given by o2 = 8, o2 = 0 = 10 and that their covariances are 12 = 2 and 13 = 023 = 0. a) Using the method of Lagrange multipliers, find an equation describing all efficient portfolios that can be created out of these three assets in other words: the efficient frontier. (Assume that shortselling is permitted.) b) Find the minimum variance point. c) Now assume there is a risk-free asset with rf = 1. Find the efficient frontier for this case. A portfolio is created out of three risky assets with expected returns 7₁ = 4,7₂ = 2 and 73 = 5. Moreover assume that their variances are given by o2 = 8, o2 = 0 = 10 and that their covariances are 12 = 2 and 13 = 023 = 0. a) Using the method of Lagrange multipliers, find an equation describing all efficient portfolios that can be created out of these three assets in other words: the efficient frontier. (Assume that shortselling is permitted.) b) Find the minimum variance point. c) Now assume there is a risk-free asset with rf = 1. Find the efficient frontier for this case.

Answer rating: 100% (QA)

a Let w1 w2 and w3 be the weights of the three assets in the portfolio respectively The expected return of the portfolio is then given by rp w1 overli... View the full answer