Homework 4 - be the allocation to the risk free rate? 7. At...

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MGMT 411 Fall 2009 1 MGMT 411 Homework 4 Due November 5, 2009 The expected returns of two risky assets (A & B) are given in the table below. Use these returns, the risk-free rate and risk aversion coefficient to complete the questions that follow. Time A B 1 0.15 -0.1 2 0.08 -0.05 3 -0.06 0.1 4 0.25 0.55 Risk-free Rate: 4% Risk aversion coefficient: 2.7 1. Calculate the expected return and standard deviation each asset, A and B. 2. Calculate the geometric return of each asset. 3. Calculate the covariance of returns between assets A and B, additionally, calculate the correlation coefficient. 4. What level of utility would the investor receive by investing in each of the assets individually? (Use the standard utility function from the text.) 5. If the investor will allocate an investment between asset B and the risk-free asset, what will be the allocation asset B? 6. If the investor will allocate an investment between asset A and the risk-free asset, what will
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Unformatted text preview: be the allocation to the risk free rate? 7. At what risk aversion level is an investor indifferent between assets A and B? (I suggest you use goal seek in Excel for this problem.) 8. If an investor were to construct an equal weighted portfolio using assets A and B, what would be the expected return and standard deviation of the portfolio? 9. What is the weight in asset A that would minimize the variance of the combined portfolio? 10. What is the weight in asset A that would maximize a sharp ratio of the combined portfolio? Report the expected return, standard deviation and sharp ratio of this optimal portfolio. 11. The investor allocates an investment between the portfolio in problem 10 and the risk free asset. What is the optimal weight in the portfolio? 12. At what risk aversion level would the investor not wish to take out a loan? (Extension of problem 11, again, youll most likely need Excel.)...
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This note was uploaded on 11/03/2009 for the course MGMT 411 taught by Professor Clarke during the Spring '09 term at Purdue University-West Lafayette.

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