Question: Two securities have the following characteristics: E( R A ) =.06 A = .04 E( R B ) =.08 B = .10 Assume that the
Two securities have the following characteristics:
E(RA) =.06 A= .04
E(RB) =.08 B= .10
Assume that the risk free rate is .04.
Consider the data above for asset A and asset B. The correlation between the two assets is 0. Below is the formula for the weight in asset A in the tangency portfolio (that is, the tangency portfolio that is found from extending a line from the risk-free rate to the tangency point of the attainable portfolios curve):
[E(RA) - rf ] 2B - [E(RB) - rf ] A B corr(RA, RB)
WA =
[E(RA) - rf ] 2B + [E(RB) - rf ] 2A - [E(RA) - rf + E(RB) - rf ] A B corr(RA, RB)
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For the tangency portfolio, find the standard deviation:
| A. | 0.03881 | |
| B. | 0.04163 | |
| C. | 0.04000 | |
| D. | 0.04231 |
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