Assignment06 - portfolio of a risk averse investor...

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EC3333 Financial Economics I Tutorial 6 (Mon 12 Oct - Friday 16 Oct ) DW 3 & 4 submit to mailbox 43, Level 6, AS2; Other groups to mailbox 47, Level 4, AS2 Deadline: 9:00pm, Friday 9 Oct Q1: Suppose the relevant market equilibrium model is the standard Capital Asset Pricing Model (CAPM) with unrestricted lending and borrowing at the risk free rate, r f . Stocks A and B have the following statistics: Er A = 10% A = 15% A,M =0 . 5 and Er B = 6% B = 10% B,M =0 . 25. The variance of market return is σ 2 M = 1%. (a) Compute the beta coefficients of stocks A and B. (1 mark) (b) Derive the value of r f and the expected return on the market portfolio Er M . (2 marks) (c) A portfolio with a standard deviation of returns of 8% has an expected return of 7%. Is the portfolio a well diversiFed one? In other words, can this portfolio be the optimal
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Unformatted text preview: portfolio of a risk averse investor? Explain. (1 mark) (c) Is it possible to construct a portfolio that has an expected return of 12% and a standard deviation of 5%? (2 marks) Q2: Consider two stocks B and C with the folllowing properties: Er B = 8% , σ B = 15% , Er C = 20% , σ C = 25%. Correlation coefficient of r B and r C is ρ BC =-. 2. The risk free rate is r f = 5%. Suppose that your client want to achieve the highest possible expected return while keeping standard deviation of her portfolio below 18%. What investment portfolio would you recommend? How high the associated expected return? (4 marks) 1...
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