Question 1 - #y(orp) is the proportion of the initial...

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Question 1 Find the composition of the balanced portfolio that maximizes the expected return of the  portfolio given that it can lend risk free subject to the constraints that the weights must  add up to one and the individual weights must be greater than or equal to zero . Find the composition of the balanced portfolio that maximizes the expected return of the  portfolio given that it can borrow risk free subject to the constraints that the weights must  add up to one and the individual weights must be greater than or equal to zero . Question 2 An investor has $1000.00 to invest and is satisfied with an expected return of 20.00% p.a. . i)How should the investor allocate the funds to achieve the desired return?
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Unformatted text preview: #y(orp) is the proportion of the initial wealth allocated to P. 20%=y(orp)*(58.62%)+(1-y(orp))*4.75% Y(orp)=28.3089% 28.3089%*1000=283.089$ 283.089*0.0285=8.06$ inBHP 283.089*0.9715=275.020 in CBA And the rest of the money invest in risk free asset by lending out 1000-283.089=716.911$ ii)Compute the consequent amount of risk faced by the investor. The SD of the ORPl is 28.23%. Risk=y(orp)*28.23%=7.99% Question 3 Another investor who also has $1,000.00 borrows an additional $5,000.00 to invest. Compute the degree of risk aversion of the investor. Total wealth is 6000 including 5000 borrowing in a risk free rate. So y=6. According to the formula in the text book (7-8), We know that E(R)=58.87% SD(R)=28.36% using the borrowing risk free (ORP) Y=E(R)-rf/0.01*A*(SD^2) A=1.0955...
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This note was uploaded on 06/12/2011 for the course ASB 1001,2522, taught by Professor Nicole during the One '09 term at University of New South Wales.

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