3330 PS6 - Cornell University Fall 2010 Economics 3330...

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Cornell University Fall 2010 Economics 3330: Problem Set 6 Due 10/21/10 1. True/False/Explain State whether each of the following is true or false and explain your answer. Please limit your explanations to no more than two sentences. a. For diversification to reduce risk, at least some of the assets must be negatively correlated. b. The optimal risky portfolio does not depend on the investor’s risk aversion. 2. Question 12 of chapter 7 of Text Suppose that there are many stocks in the security market and that Stocks A and B are perfectly negatively correlated. Stock A has expected return 10% and standard deviation of 5%. Stock NB has expected return of 15% and standard deviation of 10%. What must be the value of the risk- free rate of return in the economy? 3. Questions 9-13 of Chapter 8 of Text Suppose that the index model for stocks A and B is estimated from excess returns with the following results: R A = 3% + 0.7R M + e A R B = -2% + 1.2R M + e B σ M = 20%; R-square A = 0.20; R-square B =.12 a. What is the standard deviation of each stock?
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