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Unformatted text preview: Actsc 372 7
Test #2(a) — SPRING 200-5 _. WWNameg Marks: __ I.D.#: ‘ July 6, 2005, 1:30—2:20pm (50 minutes) 3 Questions, 3 Pages Aids: Calculator [4 markszhe correlation coefﬁcients between pairs of stocks is as follows: Corr(A,B) = 0.85; CorI(A,C) = 0.60; Corr(A,D) = 0.45.
Each stock has an expected return of 8% and standard deviation 20%. "IfSI-‘oni‘ entire portfolio now is comprised of stock A and you can add only one more
stock. Would you choose stock B, C or D or would you need more information? Justify answer. 2. [8 marks] Securities A, B: and C have the following characteristics: Security E (R) Beta
A 15% 0.7
B 25% 1.2 C 30% 1.8 (a) .What is the expected return on a portfolio with equal weights?
(b) What is the beta of a portfolio with equal ‘ 7 Are three securities priced in equilibrium? Hustify‘your answer. [‘0 3 3. [8 marks] Suppose a market consists of n risky assets and one risk-free asset. The
n risky assets are uncorrelated. with mean rate of return [1.1- and standard deviation...
oi > O, i = 1, . . . ,n. The rate of return for the risk~free asset is rf. Show thaw-553?:
formulating as an optimization problem and usingr the Method of Lagrangian multiplier, -~
the optimal holdings in the 'i—th risky asset of the efﬁcient portfolio is proportional-tog; ...
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- Spring '09
- 15%, 20%, 25%, 8%, 30%