hw4--solution

hw4--solution - 1 Chapter 7 Problem 7.1 a) The equation for...

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Unformatted text preview: 1 Chapter 7 Problem 7.1 a) The equation for the capital market line is: 5 . 07 . 32 . 07 . 23 . 07 . + = + = r . b) (i). Solve the CML equation with % 39 = r to obtain 64 . = (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 7.2 (a) ( ) ( ) 2 , 2 2 2 2 4 1 4 1 B B A A M B A + + = + = ( ) ( ) B A A AM B A A Var , 2 2 1 ] 2 1 , [ + = + = hence 2 , 2 2 M B A A A + = similarly 2 , 2 2 M B A B B + = (b) ( ) % 20 10 . 18 . 4 5 10 . = + = A r ( ) % 16 10 . 18 . 4 3 10 . = + = B r 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 ....
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hw4--solution - 1 Chapter 7 Problem 7.1 a) The equation for...

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