3-Answer - ( 1(a(i(a(ii This investor will accept 4.6763 of...

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The University of Hong Kong Department of Statistics and Actuarial Science STAT 2309 The Statistics of Investment Risk (First Semester 2009 2010) Problem Sheet 3 Suggested Solution 1. (a)(i) (a)(ii) This investor will accept 4.6763% of risk. (a)(iii) (Cash, Asset 1, Asset 2, Asset 3) = (0, 0.5833, 0, 0.4167)
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1. (b)(i) Equation for the efficient frontier is: μ = R f + [( μ - R f ) / ߪ ] ߪ μ = 1 + 1.5188 ߪ (b)(ii) 4.6091% (c) The optimal portfolio involves investing 47.25% of the total wealth in the tangency portfolio and the remaining 52.75% in the risk-free asset.
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2. Data from Ch.4 lecture notes: Average Correlation Fund Monthly Return Monthly Risk 1 2 3 4 1. Money Market 0.15% 0.12% 1 2. Capital Stable 0.78% 1.61% -0.10 1 3. Balance 1.05% 2.48% -0.02 0.86 1 4. Growth 1.20% 3.22% 0.02 0.74 0.98 1 (a) Assuming simple monthly returns, R A = (1+R M ) 12 – 1 and s A 12 1/2 s M The annualized expected returns for the four funds are: 1. Money market: (1+0.15%) 12 – 1 = 1.81% 2. Capital stable: (1+0.78%) 12 – 1 = 9.77% 3. Balance: (1+1.05%) 12 – 1 = 13.35%
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