(30pts) Consider two risky assets A and B. Your forecasts for their expected return and standard...

  

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(30pts) Consider two risky assets A and B. Your forecasts for their expected return and standard deviation are presented in the following table. You estimate their correlation would be 0.2. The risk-free rate is 3%. Asset A B Expected Return 10% 15% Standard Deviation 9% 20% (1) (4pts) Suppose you are only considering A and B. You want to have a portfolio with minimum variance and do not care about its expected return. What is the proportion invested in A and B? (2) (6pts) Now you care about expected return. What is the proportion of A and B in the optimal risky portfolio for you? What are the portfolio's expected return and standard deviation? (3) (7pts) You realize that you can also invest in the risk-free rate. Suppose you demand the expected return to be 10% and your portfolio to be efficient, that is, on the best feasible CAL. What is the proportion invested in the risk-free asset, A and B? What is the standard deviation of your portfolio? (4) (4pts) Suppose A and B are the only two risky assets in the market. All investors have the same estimates for A and B as you. The total wealth of investors is $100 million. Both A and B have one million shares outstanding. What is the market price of A and B per share? (5) (3pts) What is the average degree of risk-aversion of all investors? (6) (6pts) What is the beta of A and B? (30pts) Consider two risky assets A and B. Your forecasts for their expected return and standard deviation are presented in the following table. You estimate their correlation would be 0.2. The risk-free rate is 3%. Asset A B Expected Return 10% 15% Standard Deviation 9% 20% (1) (4pts) Suppose you are only considering A and B. You want to have a portfolio with minimum variance and do not care about its expected return. What is the proportion invested in A and B? (2) (6pts) Now you care about expected return. What is the proportion of A and B in the optimal risky portfolio for you? What are the portfolio's expected return and standard deviation? (3) (7pts) You realize that you can also invest in the risk-free rate. Suppose you demand the expected return to be 10% and your portfolio to be efficient, that is, on the best feasible CAL. What is the proportion invested in the risk-free asset, A and B? What is the standard deviation of your portfolio? (4) (4pts) Suppose A and B are the only two risky assets in the market. All investors have the same estimates for A and B as you. The total wealth of investors is $100 million. Both A and B have one million shares outstanding. What is the market price of A and B per share? (5) (3pts) What is the average degree of risk-aversion of all investors? (6) (6pts) What is the beta of A and B?

Answer rating: 100% (QA)

Lets address each part of the question step by step 1 Minimum Variance Portfolio without considering expected return To find the minimum variance portfolio without considering expected return we can u... View the full answer