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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.
1f) The portfolio with the highest Sharpe ratio has
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This note was uploaded on 09/02/2010 for the course ECON 136 taught by Professor Szeidl during the Fall '08 term at University of California, Berkeley.
 Fall '08
 SZEIDL

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