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Chapter 7 - Chapter 7 Answer Key Problem Sets 4-10 17-19...

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Chapter 7 – Answer Key: Problem Sets: 4-10 & 17-19 CFA Problems: 4, 5, & 7-11 Problem Sets: 4. The parameters of the opportunity set are: E(r S ) = 20%, E(r B ) = 12%, S = 30%, B = 15%,    From the standard deviations and the correlation coefficient we generate the covariance matrix [note that Cov(r S , r B ) =  S B ]: Bonds Stocks Bonds 225 45 Stocks 45 900 The minimum-variance portfolio is computed as follows: w Min (S) = 1739 . 0 ) 45 2 ( 225 900 45 225 ) r , r ( Cov 2 ) r , r ( Cov B S 2 B 2 S B S 2 B w Min (B) = 1 0.1739 = 0.8261 The minimum variance portfolio mean and standard deviation are: E(r Min ) = (0.1739 20) + (0.8261 12) 13.39% Min = 2 / 1 B S B S 2 B 2 B 2 S 2 S )] r , r ( Cov w w 2 w w [ = [(0.1739 2 900) + (0.8261 2 225) + (2 0.1739 0.8261 45)] 1/2 = 13.92%
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