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E120 Principles of Engineering Economics
Fall 2010
Problem Set #10
1.
Suppose the riskfree asset has expected return of 0.05, and the market portfolio has
expected return 0.15 and standard deviation 0.18. What is the minimum standard
deviation you can achieve if you desire an expected return of 10%?
2.
Suppose the riskfree asset has expected return of 0.05, and the market portfolio has
expected return 0.15 and standard deviation 0.18. Is it possible for you to achieve an
expected return of 20% and a standard deviation of 20%? Explain.
3.
Jack and Rose have decided to invest in the stock market. They both have $1,000 to
invest. Suppose that there are only two stocks available in the entire market: Stock A
and Stock B. The interest rate is 4 percent at which they can borrow or deposit
unlimited amounts of money. They will both use the Markowitz's meanvariance
model to choose their portfolios. According to Jack, the following are true for the
stocks:
Expected Return
Standard Deviation
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 Fall '08
 ILAN

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