(5) (Stochastic Dominance, 20 marks). We have three different risky assets S, S, S and also...

 

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(5) (Stochastic Dominance, 20 marks). We have three different risky assets S¹, S², S³ and also a benchmark portfolio B, whose returns in the previous three years are ال W2 W3 -5% +2% S +9% S² +1% +2% +6% S3 +3% +0.5% -1% +4% -1% +4% B The previous three years are likely scenarios for next year with probabilities 0.3, 0.5, 0.2, respectively. (a) State the possible returns b of the benchmark. [2 marks] [4 marks] (b) Compute expected value of (bk - B)+ for each bk. (c) State the linear optimization (LP) model for finding the portfolio which maximizes expected return out of all portfolios that dominate B by SSD (second order stochastic dominance). [4 marks] (d) Determine whether the portfolio x = (30%, 40%, 30%) has SSD and/or FSD (first order stochastic dominance) over the benchmark. [10 marks] (5) (Stochastic Dominance, 20 marks). We have three different risky assets S¹, S², S³ and also a benchmark portfolio B, whose returns in the previous three years are ال W2 W3 -5% +2% S +9% S² +1% +2% +6% S3 +3% +0.5% -1% +4% -1% +4% B The previous three years are likely scenarios for next year with probabilities 0.3, 0.5, 0.2, respectively. (a) State the possible returns b of the benchmark. [2 marks] [4 marks] (b) Compute expected value of (bk - B)+ for each bk. (c) State the linear optimization (LP) model for finding the portfolio which maximizes expected return out of all portfolios that dominate B by SSD (second order stochastic dominance). [4 marks] (d) Determine whether the portfolio x = (30%, 40%, 30%) has SSD and/or FSD (first order stochastic dominance) over the benchmark. [10 marks]

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a The possible returns of the benchmark are 1 4 and 1 b The expected value ... View the full answer