Consider a Treasury bill with a rate of return of 5% and the following risky securities: Security
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Question:
Security A: risk premium= .10; variance = .0400;
Security B: risk premium = .05; variance = .0225;
Security C: risk premium = .07; variance = .1000;
and Security D: risk premium = .08; variance = .0625.
If the investor must develop a complete portfolio by combining the risk-free asset with
ONLY one of the securities mentioned above,
a) Calculate the sharpe ratio for each security and choose the best risky security to achievethe best CAL.
b) If the investor wants to invest $100,000 in a portfolio with a variance of 20%, whatwould be the composition of his complete portfolio in terms of weights and amountinvested in each asset (risk free rate and risky asset)? In a plot with standard deviation inthe X axis and expected rate of return in the Y axis, graph the CAL line as well as theinvestors complete portfolio with variance of 20%. What can you conclude from the answerto the previous two questions?
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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