Consider two assets A and B. Each has the same expected return. Suppose that the variance...
Consider two assets A and B. Each has the same expected return. Suppose that the variance of the return on A is 49 and the variance of the return on asset B is 100. The returns on the two assets are correlated with a correlation coefficient of .4. If an investor wants to hold a portfolio of the two assets that has the smallest variance of its return, what fraction of the investor’s wealth should be in asset A? How would this fraction change, i.e. get smaller or larger, if the correlation coefficient got smaller?
Homework Answers
Fraction of investor's wealth in asset A = 0.77 = 77%
Fraction of investor's wealth in asset B = 0.23 = 23%
Explanation has been given in the following image
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Consider two assets A and B. Each has the same expected return.
Suppose that the variance...
Suppose there are three assets: A, B, and C. Asset A’s expected return and standard deviation are 1 percent and 1 percent. Asset B has the same expected return and standard deviation as Asset A. However, the correlation coefficient of Assets A and B is −0
Suppose there are three assets: A, B, and C. Asset A’s expected return and
standard deviation are 1 percent and 1 percent. Asset B has the same expected
return and standard deviation as Asset A. However, the correlation coefficient of
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The expected return and standard deviation of Asset C are 0.5 percent and 1
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you are considering investing in two securities. Security 1 has a expected return of 12% and...
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you are considering investing in two securities. Security 1 has a expected return of 12% and a standard deviation of ret...
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Consider the following two assets. Returns on asset 1 has a mean of ui and standard deviation of 01. Returns on asset 2 has a mean of j2 and standard deviation of 02. The correlation coefficient p1,2 measures how the two assets' returns are correlated, and it takes on values between -1 and +1. An investor puts W1 fraction of her wealth into stock 1, and W2 =1-W1 fraction of her wealth into stock 2. 1. Using the equation on...
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