nhw4a - Homework 4 1. Consider that 2 investment funds...

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Homework 4 1. Consider that 2 investment funds exist. ABC Fund(invested in 50% normal stock and 50% risky bonds) and 123 Fund(invested in 25% High risk stock and 75% normal bonds). Assume you have the following historical data of annual returns: Return S.D. Normal Stock 8% 20% Risky Bonds 10% 35% High Risk Stock 14% 40% Normal Bonds 6% 10% A. If Normal Stock and Risky Bonds have a correlation coefficient of 0.4 and High Risk Stock and Normal Bonds have correlation coefficient of 0 .2. Find the expected return and standard deviation of each Fund. ABC) e(R)=.5(.8)+.5(.1)=.09 Var=.5 2 *.2 2 +.5 2 *.35 2 +2*.5*.5*.2*.35*.4= .054625 Sd= .2337199 123) e(R)=.25(.14)+.75(.06)=.08 Var=.25 2 *.4 2 +.75 2 *.1 2 +2*.25*.75*.4*.1*.2= .018625 Sd= .136473 B. Find the optimal risky portfolio if you could only use these two funds; assume the two funds have a correlation coefficient of 0.3. (To do this use excel and create 101 different combination of the two funds, where allocation or “y” for fund ABC is 0, then.01, then .02 and so forth until y=1. For each of these points calculate the Sharpe ratio. Graph these results with returns on the y axis and S.D on the x axis. Remember to report the return and standard deviation of the optimal risky
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This note was uploaded on 10/15/2011 for the course ECON 171 taught by Professor Hull during the Spring '09 term at Brandeis.

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nhw4a - Homework 4 1. Consider that 2 investment funds...

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