Assignment_1_Spring_2010

Assignment_1_Spring_2010 - ACTSC 372 - Corporate Finance 2...

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Assignment 1 – Due June 7th 3:30 pm in the drop boxes in MC I will post solutions that evening. Question 1: Assume we have for two securities, A and B, E(ra) = 5%; E(rb) = 10%; σ A = 10%; σ B = 25%; ρ AB = -50%: (a) Complete the following chart. Use Excel to do the chart. It does not need to be fancy, just correct. W(A) W(B) E(Rp) STDEV 0% 100% 10% 90% 20% 80% 30% 70% 40% 60% 50% 50% 60% 40% 62% 38% 64% 36% 66% 34% 68% 32% 70% 30% 72% 28% 74% 26% 76% 24% 78% 22% 80% 20% 90% 10% 100% 0% Portfolio (b) Give a sketch of the efficient frontier for these two securities. Clearly show where the portfolio found in part (a), along with the portfolios containing 100% investment in securities A and B respectively appear in your graph. You may graph this in Excel. Question 2: Let M be the market portfolio, and suppose for this question that R M = 10%; σ M = 15%, and suppose the risk-free rate is 5%. (a) Plot the CML. What is the slope of the CML?
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Assignment_1_Spring_2010 - ACTSC 372 - Corporate Finance 2...

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