Question

1. Let's assume you live in a world where there are only 2 risky assets, asset A and asset B. There is also a risk free asset. You have the following information about the assets: Asset A 10% 5% Asset B 20% 25% Risk free (F) 5% 09% Expected Return Standard Deviation Let's assume the correlation between the returns of asset A and B is +1. Make a portfolio Pl that invests 50% in A and 50% in B. Calculate the expected return and standard deviation for portfolio PI. (10 points) a. b. Which statement about Pl is true: Explain why in 2 lines max. (S points) i. ii. iii. You prefer PI over A. You prefer PI over B. You MAY prefer PI to A. assume that the correlation between the returns of asset A and B is zero. Make a portfolio expected return and standard deviation of P2 that invests 50% in A and 50% in B. Calculate the portfolio P2. (10 points) d. The following graph shows the mean standard deviation frontier of the two assets when correlation is zero. Find P2 in the following graph. Show which part of the frontier is efficient. (10 points) MVP 0 300 0.000 000) 0050 010 0.250 020 0250 030 0B0 0 Stendard Devition Which statement about P2 is true: Explain why in 2 lines max. (5 points) e. i. ii. ili. You prefer P2 over A. You prefer P2 over B. You MAY prefer P2 to A. f Calculate the Sharpe ratio of P2. (5 points) Page 2 of 5

Answer 1

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