Assets X and Y have the following return distribution: Asset X Asset Y Expected Return: 11.0%...
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Assets X and Y have the following return distribution: Asset X Asset Y Expected Return: 11.0% 2% Variance: ² 0.04 0.01 The assets have a 30% correlation with each other. (i) Write down the expression for the variance of a portfolio of the two assets in terms of the portfolio weights, we and wy, their standard deviations, o and Ty and their correlation, p. [3 marks] (ii) How would you minimize this variance subject to a constraint that the ex- pected portfolio returns should be 7%? Write out the relevant Lagrangian. [3 marks] (iii) Find the optimal weights, we and wy. [9 marks] Assets X and Y have the following return distribution: Asset X Asset Y Expected Return: 11.0% 2% Variance: ² 0.04 0.01 The assets have a 30% correlation with each other. (i) Write down the expression for the variance of a portfolio of the two assets in terms of the portfolio weights, we and wy, their standard deviations, o and Ty and their correlation, p. [3 marks] (ii) How would you minimize this variance subject to a constraint that the ex- pected portfolio returns should be 7%? Write out the relevant Lagrangian. [3 marks] (iii) Find the optimal weights, we and wy. [9 marks]
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Step 1 i Expression for portfolio variance The variance of a portfolio of two assets X and Y is given by the following formula p2 wx2x2 wy2y2 2wx wy x y EXPLANATION where p2 is the portfolio variance ... View the full answer
Related Book For
Understanding Basic Statistics
ISBN: 9781111827021
6th Edition
Authors: Charles Henry Brase, Corrinne Pellillo Brase
Posted Date:
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