This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: Solution to Problem Set 3 Investments Prof. PierreOlivier Weill 1. (a) The return on the risk free asset is given as 8%. The standard deviation of that return is 0 by definition, since the asset is risk free. (b) Expected return is given by: E ( R p ) = w M E ( R M ) + w f E ( R f ) = ( . 5)( . 16) + ( . 5)( . 08) = . 12 Because the standard deviation of the return on the risk free asset is 0, the standard deviation of the portfolio is: p = w M M = ( . 5)( . 10) = . 05 = 5% (c) The standard deviation of return will be equal to: p = w M M = (1 . 25)( . 10) = 0 . 125 = 12 . 5% Expected return will be equal to: E ( R p ) = w M E ( R M ) + (1 w M ) R f = 1 . 25( . 16) + ( . 25)( . 08) = . 18 This result can also be obtained using: E ( R p ) = R f + E ( R M ) R f M p = . 08 + . 16 . 08 . 10 . 125 = . 18 (d) From above we have: p = w M M for the risk of the portfolio. The question asks for w M and w f that produces p = 2 M . Substituting 2 p for M into the equation gives:...
View
Full
Document
This note was uploaded on 02/04/2010 for the course ECON 106v taught by Professor Miyakawa during the Spring '08 term at UCLA.
 Spring '08
 Miyakawa

Click to edit the document details