# Hw02 - σ,μ-Cartesian plane 1(b Sharpe ratio for the CAL...

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Homework 1, Financial Economics Summer 2011, Instructor Rene Schweng- ber Due date: Tuesday June 28th. Before answering these questions make sure you read all handouts as well as required reading, your class notes. If you think a question is not clear send me an email. 1. Answer all multiple questions from ﬁle HW02-appendix, report your an- swer in a table like this Question # Answer Question # Answer 2. This question is about Markowitz Mean-Variance approach. We saw in class that portfolio selection problem can be divided in two disctinct steps. (a) Name these two steps. (b) Explain how time series analysis is involved in the ﬁrst step. (c) In the picture bellow, indicate the set of eﬃcient ( μ,σ ) 3. This question uses this information, E ( R P ) = μ P = . 20 P = 1 , r f = . 10 . (a) Draw the CAL line in the

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Unformatted text preview: ( σ,μ )-Cartesian plane. 1 (b) Sharpe ratio for the CAL on ( a ) is _____________. Suppose that you have utility function U ( x 1 ,x 2 ) = μ x-1 2 Aσ 2 x , with A = 0 . 05 , over portfolio x = ( x 1 , 1-x 1 ) , where x 1 is the % invested in the risky asset, R P and (1-x 1 ) the % invest in the risk-less asset, r f . (c) The utility level of portfolio (0 , 1) is __________, the utility level of portfolio (1 , 0) is ___________. (d) Write the optimal portfolio optimization problem and solve it (for full credit you must write: objective function, choice variable, and constraints, if any). (e) In your CAL diagram, indicate the mean and st. dev. of the optimal portfolio, denote it σ * ,μ * . 2...
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Hw02 - σ,μ-Cartesian plane 1(b Sharpe ratio for the CAL...

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