answer the following question in Matlab and please show all your code The Scenar

Question

answer the following question in Matlab and please show all your code The Scenario: Hypatia Reinhard has just inherited $200,000 and wishes to invest this sum in the five funds listed below Security Code Return() Risk (o) P1 BHP0.055 P2 NAB 0.070 P3 CSR 0.110 P4 AGL 0.115 P5 NCP 0.125 0.018 0.016 0.022 0.036 0.048 Funds P, P3 have a negative correlation coefficient-0.25 and funds P2: P a positive correlation coefficient +0.55. All other pairs of funds are uncorrelated. There are no restrictions on short selling and Hypatia has a risk aversion parameter measured to be t = 0.007 units 1. Determine which investors short sell in this market and which funds they short sell. Are there any funds which no-one will short sell?

Explanation / Answer

Investors would short sell the stock to reduce risk if there is a negative correlation in order to diversify the portfolio.

Here, we assume that both stocks have the same weights i.e 0.5 each

Therefore if we calculate the std. deviation between p1 and p3 assuming weights of 0.5 each we get

Sqrt ( 0.5^2*0.018^2 + 0.5^2*0.022^2 + 2 *0.5*0.5*(-0.25) * 0.018 *0.022) = 0.5

Similarly, for p2 and p5

Sqrt( 0.5^2*0.016^2 + 0.5^2*0.048^2 + 2*0.5*0.5 *(0.55)* 0.016*0.048) = 0.029

Therefore Std. deviation of P2 and P5 is less combined.

Hence investor can short sell the stocks p2 and p5

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