Consider an eight security universe with a constant correlation across all eight securities of p =...

 

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Consider an eight security universe with a constant correlation across all eight securities of p = 0.50. The return of the risk free security is r= 2%. The returns and standard deviations for the eight securities are as follows: [0.161 0.14 0.14 H4 0.11 445 H6 47 0.10 Lug. ¹0.06 442 443 = 0.11 0.10 02 03 0.08 04 0.10 [0.10₁ 0.10 = 05 06 0.05 0.08 07 0.05 Log ¹0.08 a) If short selling is allowed, determine the optimal allocation across each security in the construction of the risky portfolio (6 marks). b) If short selling is not allowed determine the optimal allocation across each security in the construction of the risky portfolio. (6 marks). Consider an eight security universe with a constant correlation across all eight securities of p = 0.50. The return of the risk free security is r= 2%. The returns and standard deviations for the eight securities are as follows: [0.161 0.14 0.14 H4 0.11 445 H6 47 0.10 Lug. ¹0.06 442 443 = 0.11 0.10 02 03 0.08 04 0.10 [0.10₁ 0.10 = 05 06 0.05 0.08 07 0.05 Log ¹0.08 a) If short selling is allowed, determine the optimal allocation across each security in the construction of the risky portfolio (6 marks). b) If short selling is not allowed determine the optimal allocation across each security in the construction of the risky portfolio. (6 marks).

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