The following expected return and the standard deviation of current returns are known:

 

a) The correlation coefficient is – 1 between security A and B. Find the expected return on the minimum-variance portfolio constructed from these two assets alone. 

b) Determine the weights of a portfolio with a standard deviation of 7% created by combining T-Bill and the market portfolio. 

c) Determine which of A or B is over-valued or undervalued. 

d) How will you invest $1000 in riskless T-bills and the risky assets in the Market Portfolio to maintain a standard deviation of 10%. 

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Security (i) A B T-Bills Market Portfolio Expected Return 0.20 0.12 0.05 0.20 Standard Deviation 0.12 0.10 0 0.15 B₁ 0.8 0 1 Security (i) A B T-Bills Market Portfolio Expected Return 0.20 0.12 0.05 0.20 Standard Deviation 0.12 0.10 0 0.15 B₁ 0.8 0 1