ORIE 4630 — D. Ruppert
Homework #5 — due Friday, Oct 1, 2010
Note:
Students are required to work independently on homework.
1.
Suppose the riskfree rate is 2% and there is one risky asset that has an expect return
of 5% and a standard deviation of the return of 15%. You want to invest in these two
assets and you want a return standard deviation of 6%.
(a)
What proportion of your portfolio should be in the riskfree asset?
(b)
What will be the expected return on your portfolio?
2.
Suppose risky assets A and B have expected returns equal to 3% and 7%, respectively,
and their return standard deviations are 5% and 16%, respectively. Their returns have
a correlation of 0.55. Assume that only these two assets and the riskfree asset are
available.
(a)
If you have a portfolio that is 80% asset A and 20% asset B, what are the expected
return and return standard deviation for your portfolio?
(b)
What is the minimum variance portfolio containing only assets A and B (and
not the riskfree asset)?
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 '10
 RUPPERT
 Standard Deviation, Variance, riskfree asset

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