In a market are listed two risky assets whose returns are described by the following parameters...

 

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In a market are listed two risky assets whose returns are described by the following parameters HA = 0,01, HB = 0.07, A = 0.2 and B = 0.12. The correlation among the securities is constant and equal to p = 0.1. 1. Derive the equation for the frontier 2. Derive the minimum variance portfolio and the equation for the efficient frontier 3. Let's add a risk free asset among the possible investments with return rf = 0.03 and derive the equation for the frontier (a) is this the Capital Allocation Line (CAL) or we should compute the efficient frontier? if this is the CAL explain why, if not derive the efficient frontier hint: think if there are inefficient portfolios on the frontier... - 4. Consider two investors, 1 and 2, with mean variance utility function, U(r) = E[ro] Var[ro]. Investor 1 has risk aversion A = 5, while investor 2 has risk aversion of 10. Find the composition of their optimal portfolios. hint: a quick review of how to invert a 2 2 matrix A a1,1 1,2 = 92,1 22 the formula for 1 02,2 the inverse is A-1- a1,102,2-1,202,1 -01,2 -02,1 a1,1 In a market are listed two risky assets whose returns are described by the following parameters HA = 0,01, HB = 0.07, A = 0.2 and B = 0.12. The correlation among the securities is constant and equal to p = 0.1. 1. Derive the equation for the frontier 2. Derive the minimum variance portfolio and the equation for the efficient frontier 3. Let's add a risk free asset among the possible investments with return rf = 0.03 and derive the equation for the frontier (a) is this the Capital Allocation Line (CAL) or we should compute the efficient frontier? if this is the CAL explain why, if not derive the efficient frontier hint: think if there are inefficient portfolios on the frontier... - 4. Consider two investors, 1 and 2, with mean variance utility function, U(r) = E[ro] Var[ro]. Investor 1 has risk aversion A = 5, while investor 2 has risk aversion of 10. Find the composition of their optimal portfolios. hint: a quick review of how to invert a 2 2 matrix A a1,1 1,2 = 92,1 22 the formula for 1 02,2 the inverse is A-1- a1,102,2-1,202,1 -01,2 -02,1 a1,1