There are three bonds to invest in: A, B, and C and a total budget of...
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There are three bonds to invest in: A, B, and C and a total budget of $100 to invest in these three bonds. Let RA, RB, Rc denote the yearly random returns of the bonds A, B, and C per $1 investment, respectively. Also, let E[RA] = 0.06, E[RB] = 0.09, E[Rc] = 0.12, o(RA) = 0.02, 0(RB) = 0.03, o(Rc) = 0.03. The returns of the investment are correlated. The covariance of RA and RB is 0.0003, covariance of RA and Rc is 0.0004, and covariance of RB and Rc is -0.0001. What is the minimum variance portfolio that achieves an expected value of at least $107 after a year of investment under the assumptions that (a) Short position is not allowed? (b) Short position is allowed? There are three bonds to invest in: A, B, and C and a total budget of $100 to invest in these three bonds. Let RA, RB, Rc denote the yearly random returns of the bonds A, B, and C per $1 investment, respectively. Also, let E[RA] = 0.06, E[RB] = 0.09, E[Rc] = 0.12, o(RA) = 0.02, 0(RB) = 0.03, o(Rc) = 0.03. The returns of the investment are correlated. The covariance of RA and RB is 0.0003, covariance of RA and Rc is 0.0004, and covariance of RB and Rc is -0.0001. What is the minimum variance portfolio that achieves an expected value of at least $107 after a year of investment under the assumptions that (a) Short position is not allowed? (b) Short position is allowed?
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Solution To find the minimum variance portfolio we need to solve the following optimization problem Minimize Portfolio variance i13 wi2 ri ER2 Subject ... View the full answer
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