Stocks A and B are the only risky assets in a market. The mean returns of...
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Stocks A and B are the only risky assets in a market. The mean returns of the two assets are r = 0.15 and rg = 0.08, respectively. The covariance matrix of the returns of the two assets (in the order of A and B) is Σ = 0.36 0.12 ( ). 0.12 0.16 Unlimited lending and borrowing is available at the risk-free effective interest rate rf = 0.03. (a) Calculate the mean return and the standard deviation of the return for the minimum-variance portfolio formed between Stocks A and B. [5 marks] (b) Portfolio C has the same mean return as the minimum-variance portfolio but its standard deviation of the return is 0.7. i. Calculate the value of beta and the Sharpe ratio of Portfolio C. ii. Describe clearly in words how one can form Portfolio C; exact calculations are not necessary. You may explain with the help of a graph if necessary. Stocks A and B are the only risky assets in a market. The mean returns of the two assets are r = 0.15 and rg = 0.08, respectively. The covariance matrix of the returns of the two assets (in the order of A and B) is Σ = 0.36 0.12 ( ). 0.12 0.16 Unlimited lending and borrowing is available at the risk-free effective interest rate rf = 0.03. (a) Calculate the mean return and the standard deviation of the return for the minimum-variance portfolio formed between Stocks A and B. [5 marks] (b) Portfolio C has the same mean return as the minimum-variance portfolio but its standard deviation of the return is 0.7. i. Calculate the value of beta and the Sharpe ratio of Portfolio C. ii. Describe clearly in words how one can form Portfolio C; exact calculations are not necessary. You may explain with the help of a graph if necessary.
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a Calcul ate the mean return and the standard deviation of the return for the minimum vari ance port... View the full answer
Related Book For
Personal Financial Planning
ISBN: 978-1111971632
13th edition
Authors: Lawrence J. Gitman, Michael D. Joehnk, Randy Billingsley
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