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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This note was uploaded on 11/09/2010 for the course FINC 2012 taught by Professor Andrew during the Three '10 term at University of Sydney.

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