You are considering constructing a portfolio that consists of one risky (asset A) and one riskless...

 

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You are considering constructing a portfolio that consists of one risky (asset A) and one riskless asset. From the historical data you know that the standard deviation on asset A is A = 10%, expected returns on the asset A and riskless asset are ra 12.5% and TRF = = = 3%, respectively. Suppose that your utility function is given by U(r₂, σ2) = r₂ — 102, with risk preference value, y of 0.18. Find the optimal weight of asset which corresponds to the portfolio and the expected return of the portfolio to maximize your utility: (10 marks) Max U(rp, 0₂²) = rp - 1/20/201 subject to Tp = TRF+WA(A — TRF) Op = WAOA Suppose that the risk-free rate of return is 3.8% and the expected rate of return on the market is 12%. Asset X, Q, Y, and Z have the following beta: ßx = 0.8, ßq = -1.2, ßy = 2.3, and ßz = 1.8. From the historical data we know that the expected returns on the assets are rx = 5.8%, rq = -3.5%, ry = 28%, and rz = 12%. Calculate the alpha of each asset and make your investment decisions. (10 marks) You are considering constructing a portfolio that consists of one risky (asset A) and one riskless asset. From the historical data you know that the standard deviation on asset A is A = 10%, expected returns on the asset A and riskless asset are ra 12.5% and TRF = = = 3%, respectively. Suppose that your utility function is given by U(r₂, σ2) = r₂ — 102, with risk preference value, y of 0.18. Find the optimal weight of asset which corresponds to the portfolio and the expected return of the portfolio to maximize your utility: (10 marks) Max U(rp, 0₂²) = rp - 1/20/201 subject to Tp = TRF+WA(A — TRF) Op = WAOA Suppose that the risk-free rate of return is 3.8% and the expected rate of return on the market is 12%. Asset X, Q, Y, and Z have the following beta: ßx = 0.8, ßq = -1.2, ßy = 2.3, and ßz = 1.8. From the historical data we know that the expected returns on the assets are rx = 5.8%, rq = -3.5%, ry = 28%, and rz = 12%. Calculate the alpha of each asset and make your investment decisions. (10 marks)

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