Fall 2008
Engineering 120
November 7, 2008
Page 1 of 1
Homework #8
1.
For each of the following statements, determine whether it is true or false. Justify your answer
providing either a proof or an (counter) example as appropriate. Assume that the Capital Asset
Pricing Model holds. Further assume that there is a risk free asset with rate
r
0
at which you can
deposit or borrow unlimited amounts of money.
a. Suppose that an investor wishes to attain an expected rate of return of ˆ
r
. If the investor is
using the Markowitzs mean variance model, the amount of money she invests in the risk free
asset will be independent of the ˆ
r
value she chooses.
b. Let portfolio A and portfolio B be two eﬃcient portfolios. If the standard deviation of portfolio
A is greater than the standard deviation of portfolio B, then the expected return of portfolio
A is also greater than the expected return of portfolio B.
c. If an asset is uncorrelated with the market portfolio, then the expected rate of return of this
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 Fall '08
 ILAN
 Operations Research, Variance, Capital Asset Pricing Model, risk free asset

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