Question

How do you obtain the weights for question b

Security Mr. Geller lected information regarding the following stocks and portfolio Portfolio P1 Security A Security B 39 109 Standard Deviation 2096 Weight Security A Weight Security B 4096 Weight Security C 20% 4096 Mr. Geller also has information regarding the following variance covariance matrix Variance - Covariance Security Security Market Portfolio Security A 0.0064 SecuB -0.005 0.04 Market Portfolio 0.05 0.025 0.04 Assume that the CAPM model is valid. Consider additionally that the expected retum from the Market Portfolio is 18%. a) (1 point) Compute the expected return and volatility (standard deviation) for portfolio Pl. Solution: E(1) - 0.4X0.05 +0.4x0.1 +0.2x0.03 - 6.60% Var[E('p)] -0.42x0.0064 +0.42X0.04 + 2x04x0.4x(-0.005) - 0.005824 opi - V0.005824 = 7.63% b) (1.5 points) Compute the expected return, volatility (standard deviation) and beta of a portfolio invested 20% in security A and 80% in portfolio P1. Solution: The portfolio mentioned is equivalent to: 52%, w 32% and we-16% E(rp) - 0.52x0.05 + 0.32x0.1 +0.16X0.03 - 6,28% Var[E(»)] = 0.5220.0064 + 0.32 0.04 + 2x0.52x0.32X(-0.005) - Opi - V0.005824 - 645% BA- 2 -1.25

Answer 1

o In the Guven problem 20./o 'muosted Security and Remaining 80% in market portfolio that means combination of (A+B+ c) Decide 80% muestments in weight proportion 4. As weight = 80 x 40% = 32./ Addi- Extra muestment in security = 20 %. so total As weight = 52% B's weight & 80 / X40% = 32% c's height a 80 % x 20 % = 16% So weights A = 52% B = 32%. c=165.