The characteristics of assets A and B are given in the table below. Recall that for...
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The characteristics of assets A and B are given in the table below. Recall that for any return distributions for assets A and B, their pairwise correlation p = OAB/GAOB where OAB is their covariance and GA.OB their standard deviations. No short selling is allowed in this case. Assets A B ii. Mean return Std. Deviation 0.5 0.4 a) Provide the expression for the shares a of A and (1 - a) of B that define the portfolio of A and B with the smallest variance in terms of their relative standard deviations and pairwise correlations. 17% 13% b) Given your answer in (a), under what conditions will a > 0? c) Now, let the standard deviations for A and B be as given in the table above. Provide the values for a and portfolio return when: i. p = -0.5; P = 0; iii. p=0.5. d) Discuss why the value of optimal a is decreasing with p e) Let the standard deviations for A and B be as given in the table above. Suppose we allow p > 4/5 (i.e., take the limit). How will your answer change from (a) and why? Explain. The characteristics of assets A and B are given in the table below. Recall that for any return distributions for assets A and B, their pairwise correlation p = OAB/GAOB where OAB is their covariance and GA.OB their standard deviations. No short selling is allowed in this case. Assets A B ii. Mean return Std. Deviation 0.5 0.4 a) Provide the expression for the shares a of A and (1 - a) of B that define the portfolio of A and B with the smallest variance in terms of their relative standard deviations and pairwise correlations. 17% 13% b) Given your answer in (a), under what conditions will a > 0? c) Now, let the standard deviations for A and B be as given in the table above. Provide the values for a and portfolio return when: i. p = -0.5; P = 0; iii. p=0.5. d) Discuss why the value of optimal a is decreasing with p e) Let the standard deviations for A and B be as given in the table above. Suppose we allow p > 4/5 (i.e., take the limit). How will your answer change from (a) and why? Explain.
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Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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