Unformatted text preview: University of California, Los Angeles Department of Statistics Statistics C183/C283 Instructor: Nicolas Christou Homework 1 Exercise 1 Use the data presented in class (returns of IBM and TEXACO, ¯ R 1 = 0 . 010 ,σ 2 1 = 0 . 0061 , ¯ R 2 = . 013 ,σ 2 2 = 0 . 0046): Find the smallest value of the correlation coefficient above which all the portfolios would have risk larger than the risk of the least risky stock. In other words, with this value of ρ , all the resulting portfolios (from all combinations of x 1 and x 2 , with x 1 + x 2 = 1 and x 1 ≥ ,x 2 ≥ 0) will have variance larger than 0 . 0046. In this case diversification is not useful in reducing the risk and you should purchase only the stock with the least variance. [ Ans. ρ = 0 . 87]. Exercise 2 Use R, Matlab, Microsoft Excel, Stata, etc. to construct the portfolio possibilities curve for the correlation coefficient ρ that you found in exercise 1....
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This note was uploaded on 06/02/2011 for the course STATS 183 taught by Professor Nicolas during the Spring '11 term at UCLA.
- Spring '11