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Problem set #6 Solution

# Problem set #6 Solution - Econ 136 Financial Economics...

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Econ 136: Financial Economics Solutions to Problem Set 6, Fall 2009 The spreadsheet solution6.xls contains all calculations for this problem set. 1a) See the first worksheet (data and calculations) 1b) There is a fairly strong positive correlation between the returns on value and growth stocks. The covariance is 0. 0.0456 and the correlation coefficient is 0.7972. 1c) See the first worksheet. One common mistake is to forget about squaring the weights in the formula for the variance. 1d) See the second and third worksheets. The efficient frontier is the part of the minimum variance frontier above the minimum variance point. 1e) From the first worksheet, the portfolio with the minimum variance (column N) corresponds to the portfolio with weights w g = 1.10 on growth stocks and w v = -0.10 on growth stocks. The mean return on this portfolio is 0.1035 and the standard deviation is 0.2078, both of which are smaller than the corresponding mean and standard deviation for the value and growth portfolios.

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