3330 PS5 sol - Cornell University Fall 2010 Economics 3330:...

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Cornell University Fall 2010 Economics 3330: Problem Set 5 Solutions There are three assets: a stock fund, a bond fund, and a risk-free T-bill money market fund that yields a sure return of 5.5%. The stock fund has an expected return of 15% with standard deviation of 32% and the bond fund has an expected return of 9% with a standard deviation of 23%. The correlation between the funds is 0.15. a. What are the investment proportions in the minimum variance portfolio of the two risky funds, and what is the expected value and standard deviation of its rate of return? The formula for the minimum variance portfolio is w Min (S) = 314 . 0 33 * 32 * 15 . * 2 529 1024 23 * 32 * 15 . 1024 ) , ( 2 ) , ( 2 2 2 B S B S B S B r r Cov r r Cov E(r Min ) = (0.686 9) + (0.314 14) 10.89% Min = 2 / 1 B S B S 2 B 2 B 2 S 2 S )] r , r ( Cov w w 2 w w [ = [(0.686 2 529) + (0.314 2 1024) + (2 0.686 0.314 .15*32*23)] 1/2
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3330 PS5 sol - Cornell University Fall 2010 Economics 3330:...

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