2009homework#5solution - Name: _ NetID: _ HADM 2222 Fall...

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Name: ___________________________________ NetID: _______________________ Prof. Q. Ma, HADM 2222 Fall 2009 1/2 HADM 2222 Fall 2009, Prof. Q. Ma Homework assignment #5 [Due 10 a.m. Wednesday November 4, 2009, Statler 435 drop box] 1. Consider the following information State Probability X Z _ Boom .25 15% 10% Normal .60 10% 9% Recession .15 5% 10% What is the standard deviation of a portfolio with an investment of $6000 in X and $4000 in Z? Solution : Portfolio weights are 60% and 40% for assets X and Z, respectively. R p is (13%, 9.6%, 7%) in (boom, normal, recession). For example, Rp for Boom = 60% * 15% + 40% * 10%= 13%. E(Rp)= .25(13%)+.60(9.6%) + .15(7%) = 10.06%. Variance=.00036924; standard deviation = 1.92%. 2. You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 15 percent and Stock Y with an expected return of 10 percent. If your goal is to create a portfolio with an expected return of 12.2 percent, how much money will you invest in Stock X? In Stock Y? Solution : Here we are given the expected return of the portfolio and the expected return of each asset in the portfolio, and are asked to find the weight of each asset. We can use the equation for the
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2009homework#5solution - Name: _ NetID: _ HADM 2222 Fall...

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