Question

Here are the risk and return estimates for the T-Note (#1) and the S&P 500 (#2) for the coming year:

Problem IV (12 points) Here are the risk and return estimates for the T-Note (#1) and the S&P 500 (#2) for the coming year: T-Note (#1) Expected Return E(R) 6%e Std, Deviation 12% Correlation (T-Note, S&P 500) = 0 S&P 500 (#2) 8% 16% 1. What is the expected return and standard deviation of the following portfolios? Portfolio Weight in Weight in T-Note S&P 500 1e 02 22 52 52 - 10 1e 32 2. What is the expected return and standard deviation of the minimum risk portfolio? 3. Which, if any, of the portfolios in the table above are dominated by the minimum risk portfolio? 4. What is your expected return and risk if you buy the minimum risk portfolio on margin (MR=0.5) You can borrow at 3 percent. 5. Suppose the correlation between the two securities (#1 and #2) is -1, what is the risk of the minimum risk portfolio that can be constructed from the two securities.

Answer 1

Date { posted potrolie on a glontant deviation of mo po IT Mobes caxR) T Bills (Sup5ool eco) Ci-ne 1 C10 ) o a 1x6- 0 7 05 (30) oso (604.0.5 x 105 184.41 crood oxlo 1 x 86.-31 o Cor.) 1 Clood en inte ER on ship 500 = 12). ECR) on portfolio - 124.49 4. Portfolio S.D E I who not waste 500 et ax (wi) x(se) x8 = V015) 12° + (15) 2x (1:9) (15)x o 73 30% There fore ECR) on portfolio - 21% with poolfolio s.O - 75 30%.

ECAS 2 soat L ID of minimum gisk we can consider for T-Notes portfolio, I Notes - E(R) CSD tx64 26.1 .1X12): 29). 0.5X61 - 37 05x12=64. 0 x 6% =0% 91. 0x124. 20 18) o. Minimum risk EC): 9.1 portfolio , SD = 18%. Answer 3 T- Noles portfolio is dominated by minimum risk. Answer y If selon you can borrow at 3 % margin, then your = 9.7. - 3% - 60% u lo Answers Replacing the old equation of Portfolio S.D. coith 1 correlation +C16 x 12² x 16²4 2x(15) (15) x-1 = V (1:5)*x 12° +(15)-xlo +2x615)-1 v goo + (-45) 29.99%