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3330%20PS4 - Cornell University Fall 2009 Economics 3330...

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Cornell University Fall 2009 Economics 3330: Problem Set 4 Due 10/19/09 1. Questions 10 and 11 of Chapter 6 of Text a. Calculate the expected return and variance of portfolios invested in T-bills and the S&P 500 index with weights in the following table. Assume that the S&P return has been 8.5% more than the T-bill return of 5%. Assume that the standard deviation has been 20% for the S&P and zero for the T-bills. W bills W index 0 1 0.2 0.8 0.4 0.6 0.6 0.4 0.8 0.2 1 0 b. Calculate the utility levels of each portfolio for an investor with A=3. What is the optimal portfolio? c. Calculate the utility levels of each portfolio for an investor with A=5. What is the optimal portfolio? 2. Questions 4 to 10 of Chapter 7 of Text A pension manger is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a rate of 8%. The probability distribution of the risky funds is as follows, with the correlation between the funds being 0.10.
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