IPM_Quiz2(a)_Solution

IPM_Quiz2(a)_Solution - BUS 415 INVESTMENT AND PORTFOLIO...

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BUS 415: INVESTMENT AND PORTFOLIO MANAGEMENT SPRING 2011, AUBG Quiz 2(a) Problem 1 (10 points): Consider the two securities listed below: Risky security: E(R) = 10%, σ = 20%. Risk-free security: Rf = 5%. You wish to form a portfolio combining the risky security and the risk-free security such that you earn an expected return of 15%. a. (3 points) What weights would you need to place in the risky and risk-free securities to earn a 15% expected return? What is the standard deviation of this portfolio? b. (2 points) Draw the capital allocation line (CAL). Label the points and the axes clearly. What is the reward-to-variability ratio? Now, suppose that instead of one risky security and one risk-free security, you can invest in two risky securities (bond and stock mutual funds) as follows: Security 1: E ( R ) = 8% , σ A = 12%; Security 2: E ( R ) = 13% , σ B = 20%, and the correlation coefficient between them is 0.3. c. (5 points) Find the expected return and the standard deviation of the minimum-variance portfolio (MVP) on the investment opportunity set. Draw a tangent from the risk-free rate to the investment opportunity set. Solution:
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IPM_Quiz2(a)_Solution - BUS 415 INVESTMENT AND PORTFOLIO...

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