Suppose that the world's economy consists of only two risky assets (XOM and INTC) and one...

 

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Suppose that the world's economy consists of only two risky assets (XOM and INTC) and one risk-free asset (F). The risk-free rate is currently 5%. The possible risky asset returns are described below: Scenario Probability XOM Return INTC Return 20% 10% -30% 20% -10% -5% 40% 20% 15% 20% -5% 50% Suppose that you are a wealth manager for a client with the type of utility function described in class where her risk aversion is A = 2. a) (7 pts) What are the expected returns and volatilities of XOM and INTC? What is their correlation? b) (9 pts) If your client can purchase only a single asset (i.e., XOM only, INTC only or F only), which asset would your client prefer? (Hint: compare client's utilities) c) (9 pts) Would your client prefer a portfolio (call it E) consisting of 50% XOM and 50% INTC to the asset that you identified in part (b)? (Hint: compare client's utilities) Suppose that the world's economy consists of only two risky assets (XOM and INTC) and one risk-free asset (F). The risk-free rate is currently 5%. The possible risky asset returns are described below: Scenario Probability XOM Return INTC Return 20% 10% -30% 20% -10% -5% 40% 20% 15% 20% -5% 50% Suppose that you are a wealth manager for a client with the type of utility function described in class where her risk aversion is A = 2. a) (7 pts) What are the expected returns and volatilities of XOM and INTC? What is their correlation? b) (9 pts) If your client can purchase only a single asset (i.e., XOM only, INTC only or F only), which asset would your client prefer? (Hint: compare client's utilities) c) (9 pts) Would your client prefer a portfolio (call it E) consisting of 50% XOM and 50% INTC to the asset that you identified in part (b)? (Hint: compare client's utilities)

Answer rating: 100% (QA)

a To calculate the expected returns and volatilities of XOM and INTC well use the provided probabili... View the full answer