4G × Question Consider two risky assets, A and B and a risk-free asset, F. The a
ID: 2614049 • Letter: 4
Question
4G × Question Consider two risky assets, A and B and a risk-free asset, F. The average rate of return and the standard deviations are given as the attached table, and correlation coefficient between Assets A & B are 0.01. Suppose you consider portfolios by using $1000. Answer the following questions: Asset deviation Rate of return 12% i: 4% Asset B ii 16% Asset c (Default Points:4points) When you form a portfolio which consists of Assets B &F; Then, answer the relationship between the rate of return and standard deviation, which is a so-called capital market line. To answer this question, let r, wand s be the rate of return of the portfolio, a weight of asset B, and the standard deviation of the portfolio, respectively. Then, the relation can be represented as r=a x w + b, and s = c × w. Answer the triple of (a, b, c) (0.1, 0.16, 004) 0.12,0.08, 0.04) (0.12. 0.08, 0.08) (0.08. 0.16, 0.04 (0.1, 0.08, 004) 0.08, 0.08, 0.08) (0.08, 0.16, 008) O (0.1, 0.08. 0) (0.08, 0.16. 0) (0.12, 0.08, 0)Explanation / Answer
Portfolio Return =(Return of B)*(Weight of B)+ (Return of F)*(Weight of F)
Return of B=0.16
Weight of B=w
Return of F=0.08
Weight of F=1-w
Portfolio Return=r=0.16*w+0.08*(1-w)
r=0.16*w+0.08-0.08*w
r=0.08*w+0.08
r=a*w+b
a=0.08
b=0.08
Standard Deviation (Std Dev)
Portfolio Variance =(Weightof B^2)*(Std dev of B^2)*+(Weight of F^2)*(Std Dev of F^2)+2 (Weight of B)*(Weight of F)*Cov (B,F)
Std Dev of F=0
Cov (B,F)=0
Portfolio Variance==(Weightof B^2)*(Std dev of B^2)*
Portfolio Standard Deviation(Std Dev)=(Weight of B)*(Std dev of B)
Portfolio Standard Deviation(Std Dev)=s=w*0.08
s=0.08w
s=c*w
c=0.08
Hence ,
a=0.08
b=0.08
c=0.08
Answer:(0.08,0.08,0.08)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.