E120
Homework 6
Due 08/12/2011
Problem 1:
Suppose that there are 2 assets with
r
1
= 0
.
20
, σ
1
= 0
.
40
, r
2
= 0
.
10
, σ
2
= 0
.
25
, σ
12
= 0
.
05.
1. If
r
f
= 0
.
02, what are the market portfolio return and variance?
What are the
corresponding weights?
2. If
r
f
= 0
.
05, what are the market portfolio return and variance?
What are the
corresponding weights?
Problem 2:
Suppose the riskfree asset has expected return of 0
.
05, and the market portfolio has ex
pected return 0
.
15 and standard deviation 0
.
18. What is the minimum standard deviation
you can achieve if you desire an expected return of 10%?
Problem 3:
Suppose the riskfree asset has expected return of 0
.
05, and the market portfolio has
expected return 0
.
15 and standard deviation 0
.
18. Is it possible for you to achieve an
expected return of 20% and a standard deviation of 20%? Why, or why not?
Problem 4:
Assume that the expected rate of return on the market portfolio is 23% and the rate of
return on Tbills (the riskfree rate) is 7%. The standard deviation of the market is 32%.
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 Summer '11
 ALDER
 riskfree asset, Classical Inc

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