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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