please solve question 3 and show your steps thanks The Scenario: Hypatia Reinhar
ID: 2774036 • Letter: P
Question
please solve question 3 and show your steps thanks The Scenario: Hypatia Reinhard has just inherited $200,000 and wishes to invest this sum in the five funds listed below. Funds P_1, P_3 have a negative correlation coefficient -0.25 and funds P_2, P_5, 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. Determine which investors short sell in this market and which funds they short sell. Are there any funds which no-one will short sell? Hypatia's Optimal Portfolio: Carry out the following computational tasks for Hypatia's optimal portfolio P*. Obtain the dollar investment in each of the five funds and obtain the corresponding expected return and risk of P*. Obtain the mu sigma-plane graphical representation and include (all on the same graph): - The five investment funds. The minimum variance and efficient frontiers. Use a t-range |t|Explanation / Answer
Question 3:
The available asset is a riskless cash fund which is a liquid fund giving a return of 4%
Initially, it is assumed that all the five funds mentioned P1 to p5 have equal allocation of 20% in the porfolio
Tangency porfoilio is the worswt case scenarios which minimizes the loses. Since this is risk free fund in order to minimize the losses, we have to remove a equal potions of the p4 and p5 the most risky funds and provide for this riskless fund
Hence the new alocation will be 20% to P0 (riskless fund), 20% to p1, 20% to p2, 20% to p3 , 10% to p4 and 10% to p5
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