Question

following expected return and risks: Loans Risk 0.06 2 Expected Returns 0.14 0.08 0.2 0.05 0.03 0.15 In addition, the assets correlate with each other, the correlation coefficients of the returns of the assets are as follow: P12 = P21 = 0.5 P13 = P31 = 0.2 223 = P32 = 0.4. Show that CML is given by Ř= 26+298720, the optimal portfolio of risky assets is a1 = 7, 22 = iş, 23 = 5, the market price of risk is 1.66, and the risk of the optimal portfolio is 0.058. V 609

Answer 1

OOOO 2 COV, 2 . cor, 2>>COY, w th of 1,2,5 opO383 1,243 wespechy ornar 1.66 (geven). deyhan al no Ř• Rp + (RM-Rex SOP Son Standard SOM + 2912 Co-os) S - Storderd devieno portfolio 0.05 + 0.096390081 0.14639 008tor 146890041% 20 G Hence, the CML IS 14.6890081%

Risco) EUR) 0.14 0.08 0-2 0.05 0.3 o > as s o Rok Risk for Loon with portfolio 4 ' -> *+95 considered as free rate to. Re 5%. 312 Covi, i Cov,, ?125, 00 SOS X 0.06 X: 0.2 x0.06x0.15