Jonathan becomes a fund manager of an investment bank after graduation. His client is

considering investing in a portfolio of two shares, Apple and Banana.

a$)$ Define and construct the statistical methods to estimate the expected returns, the

standard deviations, the covariance and the correlation of the shares.

b$)$ Jonathan$$s client is extremely risk averse and not sure how much exactly she should

invest in each share. However, she would like to maximize the return of the portfolio

while keeping the risk of the portfolio low.

The information for the shares is given as follows:

Apple $=5\%($Expected returns$)$

Apple $=10\%($Standard Deviation$)$

Banana $=10\%($Expected returns$)$

Banana $=20\%($Standard Deviation$)$

The returns of the two shares are normally, independently and identically distributed.

Required

 

i$)$ Calculate the covariance between Apple and Banana.

ii$)$ Calculate the optimal weights for the two shares.

iii$)$ What is the expected return of the optimal portfolio?

iv$)$ What is the standard deviation of the optimal portfolio?

Answer rating: 100% (QA)

There are several parts to your question so Ill break down my response accordingly i Calculate the c... View the full answer