Tutorial 07 Solutions 2009

Tutorial 07 Solutions 2009 - EFN406 1 TUTORIAL SEVEN...

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EFN406 1 TUTORIAL SEVEN Tutorial 7 Questions 1. BF page 203 Questions 2-10. 2. BF page 204 Problems 5, 7 and 9. Note that there is a typo in the solution to self-test problem two the final two lines should read: σ = √.014177 = .119067 Tutorial 7 Solutions 1. BF page 203 Questions 2-10 BF, Q2 The benefit of diversification is risk reduction, which is improved the lower the correlation between returns. BF, Q3 Yes, if they are perfectly negatively correlated. BF, Q4 Not necessarily. If the risk of the new asset is greater than the existing portfolio, there may still be an increase in the portfolio standard deviation. The portfolio risk will, however, be lower than the weighted average risk of the component parts. BF, Q5 (a) The combinations of risky assets that maximise return for a given level of risk. (b) On the expected return/standard deviation grid, a straight line joining the riskfree rate and the market portfolio. This plots which plots efficient investments. (c)
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Tutorial 07 Solutions 2009 - EFN406 1 TUTORIAL SEVEN...

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