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# Extra2 - minimum value And what is the corresponding...

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1. 2. Extra Tutorial Questions Week 3 3. EQ4. Gavin’s friend is planning to invest \$1million in a rock concert to be held 1 year from now. The friend figures he will obtain \$3million revenue from his \$1million investment – unless it rains. If it rains, he will lose his entire investment. There is a 50% chance that it will rain the day of the concert. Gavin suggests that he buy rain insurance. He can buy one unit rain insurance for \$.50, and this unit pays \$1 if it rains and nothing if it does not. He may purchase as many units as he wishes, up to \$3million. a. What is the expected rate of return on his investment if he buys u units of rain insurance? (the cost of the insurance is in addition to his \$1million investment) b. What number of units will minimise the variance of his return? What is this
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Unformatted text preview: minimum value? And what is the corresponding expected rate of return? [ Hint : before calculating a general expression for variance, think about a simple answer] EQ6. Assume that the expected rate of return on the market portfolio is 23% and the rate of return on T-bills (the risk-free rate) is 7%. The standard deviation of the market is 32%. Assume the market portfolio is efficient. a. What is the equation of the of the capital market line? b. i. If an expected return of 39% is desired, what is the standard deviation of this position. ii. If you have \$1,000 to invest, how should you allocate it to achieve the above position? c. If you invest \$300 in the risk-free asset and \$700 in the market portfolio, how much should you expect to have at the end of the year?...
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