HW4_Solutions.2006

HW4_Solutions.2006 - MS&E 242 Investment Science HW#4...

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Unformatted text preview: MS&E 242 Investment Science HW #4 Solutions Prof. James Primbs November 14, 2006 Problem 7.1 a) The equation for the capital market line is: σ σ 5 . 07 . 32 . 07 . 23 . 07 . + = − + = r . b) (i). Solve the CML equation with % 39 = r to obtain 64 . = σ (ii). Solving ( ) 39 . 23 . 1 07 . = ⋅ − + ⋅ w w , gives 1 − = w . Hence, borrow $1000 at the risk free rate; invest $2000 in the market. c) Your expected return is ( ) 182 . 23 . 7 . 07 . ) 3 . ( = ⋅ + ⋅ . Hence you expect to have ($1000)(1.182) = $1182. Problem 7.3 The market has three assets: %, 10 1 = r %, 20 2 = r % 10 3 = r . We are also given that the weights on two portfolios on the minimum-variance set are = 20 . 20 . 60 . w − = 40 . 20 . 80 . v a) By the 2 fund theorem, we know that the market portfolio must be a combination of w and v. Since the market portfolio must have positive weights on all assets, this means:...
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This note was uploaded on 11/15/2008 for the course MS&E 242 taught by Professor Primbs during the Fall '06 term at Stanford.

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HW4_Solutions.2006 - MS&E 242 Investment Science HW#4...

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