H AAS S CHOOL OF B USINESS U NIVERSITY OF C ALIFORNIA AT B ERKELEY UGBA 103 A VINASH V ERMA H OMEWORK 9 : D UE A UGUST 1 2011 1. Stock A and Stock B are expected to return 6.3% and 3.15% respectively on an annual basis. The variance of returns on Stock A is 0.64 while the variance of returns on Stock B is 3025%%. Assuming that Stock A and Stock B have the smallest possible correlation, work out r 1 , the risk free rate in one year markets. 2. [a]: Security 1 is expected to generate a return of 18% with a standard deviation of 0.45 over the next year. For the same period, security 2 is expected to return 21% with a variance of 3600%%. The correlation between the returns on the two securities is negative one-eighth. Investor A wants to form a portfolio of these two securities such that it has the minimum possible risk as measured by the portfolio standard deviation. She has $16 million to invest. How much would she invest in each security? Work out the expected return on and the variance of the returns on the risk-minimizing portfolio. What
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This note was uploaded on 09/11/2011 for the course UGBA 103 taught by Professor Berk during the Summer '07 term at Berkeley.