a)Giventhe following,calculatetheportfolio’sexpected return, variance,andstandarddeviation.

| November 18, 2015

1a)Giventhe following,calculatetheportfolio’sexpected return, variance,andstandarddeviation.

 

Investment E(R) StdDev Weight CorrelationCoefficient
A 0.05 0.07 0.50 0.7
B 0.09 0.07 0.50  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assumethefollowingchangesoccur.

 

Investment E(R ) StdDev Weight CorrelationCoefficient
A 0.05 0.06 0.472 0.8
B 0.09 0.075 0.528  

 

 

1b)As aMarkowitz-efficientinvestor, whichportfoliowouldyouprefer,theoriginalportfolioorthisportfolio,andwhy?

 

1c)Oncethesechanges occur, is this portfolionowriskless?Explain.

 

2)Youhaveaportfolioof twoassets, onewith anexpected returnof10%andastandarddeviationof returnof9%,theotherwithanexpectedreturnof 10%andastandarddeviationofreturnof 8%. Together,theyhaveacovarianceof-.0072. Theyareequally weighted intheportfolio.

 

Is itpossible tocreatea risklessportfolioundertheseconditions.Why?Beasthoroughaspossible.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3a)InCapitalMarketTheory, whatistheriskmeasurefor anindividual investment?

3b)Whyisthis so?

 

5)InCapitalMarketTheory, weassumed no transactions costs,whichseemed unrealistic.However, thereareinstanceswhere thisassumptionisnotcompletelyinvalid. Onesuchcaseis residential real estate,whereonlythesellertypicallypays acommissionforatransaction. Assumethe risk-freerateis

6%,salescommissions are3%, andthe SMLis apositively-sloped line(i.e. normal). Inwords, graphs,orboth, explainhowthistypeof commissionwouldalterthe SMLandthe pricingofresidentialreal estate assets

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OPINION ANSWER FOR MODULE 7.1
The solution to problem #3 on page 63 is

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