Chapter7 - Investment Science Chapter 7 Solutions to...

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Investment Science Chapter 7 Solutions to Suggested Problems Dr. James A. Tzitzouris <jimt2@ams.jhu.edu> 7.1 (a) ¯ r = 0 . 07 + 0 . 23 - 0 . 07 0 . 32 σ = 0 . 07 + σ 2 (b) i. σ = 0 . 64, ii. Solve 0 . 07 w + 0 . 23(1 - w ) = 0 . 39, yielding w = - 1. Hence, borrow $1000 at the risk-free rate; invest $2000 in the market. (c) $1182 7.2 (a) σ 2 M = 1 4 ( σ 2 A + 2 σ AB + σ 2 B ) , σ 2 AM = 1 2 ( σ 2 A + σ AB ) , σ 2 AB = 1 2 ( σ AB + σ 2 B ) , β A = σ 2 A + σ AB σ 2 M , β B = σ 2 B + σ AB σ 2 M . 1
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(b) ¯ r A = 0 . 1 + 5 4 (0 . 18 - 0 . 1) = 20% , ¯ r B = 0 . 1 + 3 4 (0 . 18 - 0 . 1) = 16% . 7.3 (a) Using the two-fund theorem and noting that the market portfolio cannot contain assets in negative amounts, we have 1 2 w + 1 2 v = ( 0 . 7 0 0 . 3 ) T with a return of 0 . 1 , 2 w - v = ( 0 . 4 0 . 6 0 ) T with a return of 0 . 16 , so the expected rate of return of the market portfolio ¯ r M is bounded as follows: 0 . 1 ¯ r M 0 . 16. (b) Since ¯
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This note was uploaded on 04/02/2010 for the course EE 204 taught by Professor Won during the Spring '10 term at 카이스트, 한국과학기술원.

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Chapter7 - Investment Science Chapter 7 Solutions to...

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