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 riskfree rate is 5%.
(a) Plot the CML. What is the slope of the CML?
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 Fall '09
 AHMED
 Capital Asset Pricing Model, CML, Modern portfolio theory

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