Question: Question 1 (35 %) H.M.Arkowitz is a risk averse, rational investor and is considering building up a portfolio of assets. He can choose between two

Question 1 (35 %)

H.M.Arkowitz is a risk averse, rational investor and is considering building up a portfolio of assets. He can choose between two risky assets A and B, with

Asset i A B E(ri) in % p.a. 10 15

Correlation (ri) in % p.a. 12 22

The returns on these two risky assets are correlated with %(rA,rB) = 0.66. (a) H.M.Arkowitz can only invest in these two assets. Calculate the expected return, the volatility, and the portfolio

weights of the minimumvarianceportfolio, in case short sales are allowed.

(b) Assume the returns on these two risky assets are perfectly positively correlated, shortselling of risky assets is prohibited, and that there is the possibility to save or borrow at a riskfree rate of 2 % annually.

(b1) Calculate the portfolio weights, the expected return and the volatility of the tangency portfolio.

(b2) Assume H.M.Arkowitz is willing to accept an annual volatility of 3 %. Calculate the maximum return that H.M.Arkowitz can achieve in this case and determine the optimal portfolio weights.

(b3) Assume H.M.Arkowitz wants to attain an expected annual return of 14 %. Calculate the volatility and the composition of the portfolio he would have to invest in.

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

H.M.Arkowitz is a risk averse, rational investor and is considering building up a portfolio of assets. He can choose between two risky assets A and B, with Asset i A B E(ri) in % p.a. 10 15 standart...

1. Carl, a risk averse investor, wants to construct a portfolio using both risk free and risky assets. He has gathered the following information about 2 risky assets Y and Z, Which of these 2 assets...

Total 45 marks Problem #1 (8 marks) Information on two assets, X & Y, is below. Portfolios A through Khave been constructed by varying the weights of Asset X and Asset Y, and the Expected Return and...

Question #4: Ch06- Capital Allocation to Risky Assets [25 points] 1. An investor has access to two different assets to invest in: Risk-free T-Bills, and a US stock index fund. The investor has a risk...

1. Texas Roadhouse (TXRH) is rapidly expanding into new markets and had sales of $1,263M in 2012. Suppose you expect sales to grow at a 15% rate in 2013, but this rate will slow by 2% per year to a...

1- You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X...

Suppose that T-bills currently have a rate of return of 2%. As- sume that borrowing is possible at the risk free rate. You are risk averse and you are considering constructing a portfolio consisting...

Question-1 Consider a company whose stock is expected to follow the following pattern under the different economic situations: Return (%) Probabilities -20 0.05 -10 0.10 10 0.20 15 0.25 20 0.20 25...

Use the direct method to prepare the cash provided or used from operating activities section only of the statement of cash flows for thiscompany. ORWELL, INC. Balance Sheets December 31,2011 2011...

(a) Provide a combinatorial argument to show that if n and k are positive integers with n = 3k, then n!/(3!)k is an integer. (b) Generalize the result of part (a).

As a practical matter, an investment that pays back rapidly and has benefits extending beyond the cutoff period probably has a / nl ) positive NPV NPV equal to zero negative NPV

10) For a bond that pays cash interest (i.e., not a zero coupon bond), YTM is (a) always equal to the coupon rate (b) always equal to the current yield (c) is always less than the coupon rate (d) can...

C Have you ever witnessed the beginning tremors of a smart mob in any of the social networks of which you are a part? What kinds of goals might motivate you to join a smart mob?

In Chapter 7, we talked about family as an example of interpersonal relationships. Now think about your family as a group. What are the familys common goals? What do the members of your family see as...

Think about your experience as part of a group to which you no longer belongan old job, your high school class, or a club that youre not a part of anymore. Did the group go through all five phases...