"Problems_2_solutions

"Problems_2_solutions - MGMT41100 B.-H. Hwang...

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MGMT41100 – B.-H. Hwang – Spring 2010 Practice Problems #2 - Solutions 1. You invest a total of $100 in (1) a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.21 and (2) a risk-free asset with a rate of return of 0.045. a) How would you form a portfolio that has an expected outcome of $114? Answer: You want an expected return of 14% ($100 $114) Solving for 0.14 = w 1 (0.11) + (1 - w 1 )(0.045) 0.14 = .11w 1 + .045 - .045w 1 0.095 = 0.065w 1 => w 1 = 1.46 $146 and w f = (1- w 1 ) = -0.46 -$46. So the portfolio is formed by borrowing $46 at the risk-free rate and investing the total amount ($146) in the risky asset. b) What is the slope of the Capital Allocation Line formed with the risky asset and the risk-free asset? Answer: The slope of the Capital Allocation Line formed with the risky asset and the risk-free asset equals (0.11 - 0.045)/0.21 = 0.3095. 2.
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"Problems_2_solutions - MGMT41100 B.-H. Hwang...

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