Assignment2 - Expected Return Standard Deviation Fund A 0.08 0.10 Fund B 0.12 0.20 Fund C 0.15 0.30 The correlations between the funds are Between

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ActSc 372 Winter 2009 Assignment 2 Due Date: February 4 2009 (at start of class 12:30pm) 1. Suppose you have invested only in two stocks, A and B. You expect that returns on the stocks depend on the following three states of economy, which are equally likely to happen. State of Economy Return on Stock A (%) Return on Stock B (%) Bear -5.0 4.5 Normal 6.5 3.2 Bull 18.0 1.8 (a) Calculate the expected return of each stock. (b) Calculate the standard deviation of the return of each stock. (c) Calculate the covariance and correlation between the two stocks. (d) Calculate the expected return and the standard deviation of the return on a portfolio of 30 shares in A and 50 shares in B. Both A and B currently cost $1 per share. 2. You are given the following information on three risky funds:
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Unformatted text preview: Expected Return Standard Deviation Fund A 0.08 0.10 Fund B 0.12 0.20 Fund C 0.15 0.30 The correlations between the funds are: Between Fund A and Fund B: 10% correlation Between Fund A and Fund C: 70% correlation Between Fund B and Fund C: -10% correlation. (a) Identify x min , z * , μ x min and σ x min . (b) Given that you want a variance of no more than 15%, what is the best return you can achieve, and what portfolio weights will give you this portfolio? (c) Using any appropriate software, draw the efficient frontier for this example. You should submit all appropriate output. 3. Show that for the standard Markowitz model (with N risky assets), σ z * = 0 if and only if μ is a multiple of e ....
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This note was uploaded on 06/10/2010 for the course ACTSC 372 taught by Professor Maryhardy during the Winter '09 term at Waterloo.

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