Assignment02_A

# Assignment02_A - EC3333 Financial Economics I Tutorial...

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EC3333 Financial Economics I Tutorial 2 (Mon 6 Sep - Friday 10 Sep ) DW 1 & 2 submit to mailbox 43 (Dr. Lu), Level 6, AS2; DW 3, 4 & 5 submit to PhD student mailbox 8 (Ms. Liu) , Level 4, AS2; DW 6, 7 & 8 submit to Master student mailbox 4 (Mr. Li), Level 4, AS2 Deadline: 6:00pm, Friday 3 Sep. Q1. (5 marks) There are two assets that are available for an investor to construct his portfolio: a risky asset B with an expected return of 6-percent and a standard deviation of 4-percent, and a risk-free T-bill that delivers a 5-percent return. (a) Using the above information, draw the Capital Allocation Line, and write down the expression for the Capital Allocation Line. (1 mark) A: Slope S p = Er B - r f σ B = 0 . 25. The CAL is Er c = 0 . 05 + 0 . 25 σ c . (b) Suppose the investor invests 25 percent of his/her wealth in the risky asset and 75 percent in the T-bill. What are the expected return and standard deviation of his/her portfolio? (1 mark) A: r c = 0 . 75 r f + 0 . 25 r B . Er c = 0 . 75 r f + 0 . 25 Er B = 5 . 25%. σ c = 0 . 25 σ B = 0 . 01. (c) Can you construct a portfolio with an expected return of 7-percent and a standard deviation of 5-percent? Why? (1 mark) A: Note Er c = 0 . 05 + 0 . 25 σ c . When σ c = 0 . 05, we have Er c = 6 . 25% = 7%. Not possible.

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