Project #1 - - 11/2/2009 Optimization Project Project 1 Bus...

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11/2/2009 Optimization Project – Project 1 Bus 172B 1. Using these date in the portfolio optimization program develop the EF (efficient frontier). Also develop the CML (capital market line). Provide the equation for the CML. What is the composition of the PM? Are there any negative weights? If so, what does this mean? The data in the portfolio optimization: PORTFOLIO OPTIMIZATION
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ONE PLUS . INPUTS EXPECTED STANDARD EXP RATE . . RETURN DEVIATION {1+E®} ONES Riskless Rate ® 5.00% 0.00% 105.00% . 14.72% 17.49% 114.72% 100.00% IA Small Stock 15.25% 20.75% 115.25% 100.00% IA All Value 14.55% 16.23% 114.55% 100.00% IA All Growth 14.31% 20.52% 114.31% 100.00% MSCI EAFE 13.97% 25.50% 113.97% 100.00% LB Bond 9.25% 6.34%
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The EF (efficient frontier) and the CML (capital market line): The equation of the CML: r = r f + ( r m - r f / σ m ) σ The composition of the PM: 1 1 1 EFFICIE NT FRONTIE R CURVE EFFICIE NT TRADE OFF LINE INDIVIDUAL ASSET . . . I N D E X STANDARD DEVIATION EXPECT ED RETURN . EXPECTED RETURN . OPTIMAL COMBINATION OF RISKY ASSETS IN TANGENT PORTFOLIO . 17.49% . . 14.72% . 13.48% IA Small Stock . 20.75% . . 15.25% . 10.16% IA All Value . 16.23% . . 14.55% . 15.40% IA All Growth . 20.52% . . 14.31% . 9.33% MSCI EAFE . 25.50% . . 13.97% . 5.83% LB Bond . 6.34% . . 9.25% . 45.79%
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No, there is no negative weights, which means that the investor who borrows money to fund his/her purchase of the risky assets has no free weights. 2. Select the point on the CML which is your personally optimal point. Why did you select this point? What is the composition of your personally optimal portfolio? How much borrowing/ lending of the risk free asset is involved in forming this portfolio? I select the standard deviation point 7.11% and the expected return point 13.51% on the
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Project #1 - - 11/2/2009 Optimization Project Project 1 Bus...

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