homework1f09ans - Econ 434 Professor Ickes Fall 2009...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Econ 434 Professor Ickes Fall 2009 Homework Assignment #1: Answer Sheet This assignment is due on Tuesday, September 15, at the beginning of class (or sooner). 1. Consider the following returns data for two economies, Macrodonia and Microdonia: Panel A −−−−−−−−−−−−−−−−−−−−−−− Panel B −−−−−−−−−−−−−−−−−−−−−−−−− Year Macrodonia % Microdonia % x % y % Return % Risk % 1994 9 . 52 8 . 11 0 0 0 1 3 . 38 23 . 15 1995 56 . 76 9 . 4 9 01 3 . 85 21 . 53 1996 6 . 22 1 . 1 8 02 4 . 31 20 . 52 1997 36 . 62 5 . 3 7 03 4 . 77 20 . 2 1998 14 . 31 0 . 7 6 04 5 . 24 20 . 61 1999 12 . 56 7 . 7 5 05 5 . 72 1 . 71 2000 42 . 6 28 . 6 4 06 6 . 17 23 . 4 2001 0 . 5 34 . 0 3 07 6 . 64 25 . 56 2002 12 . 1 13 . 9 2 08 7 . 12 8 . 09 2003 12 . 4 . 5 1 09 7 . 57 30 . 89 average 13 . 38 18 . 03 0 100 18 . 03 33 . 90 standard deviation 23 . 15 33 . 90 correlation 0 . 127 (a) Calculate the average return and the standard deviation of returns for each country over this period (use a calculator or an excel spreadsheet,whichhasabui lt-informu laforthis, or the excel program I provided for the class in my lecture). Also calculate the correlation of returns across the countries. The latter is denoted by ρ ij . brief answer see table. (b) The expected return for a portfolio with two assets is given by R p = xR i + yR j .L e t i be Macrodonia and j be Microdonia, and let x be the share of the portfolio invested in Macrodonia assets, and y the share in Microdonia assets. Calculate the expected returns for each of the ten portfolios given by the weights in panel B of the table. brief answer see table. (c) Ther isko faport fo l ioisg ivenbyitss tandarddev iat ion , σ . For a portfolio of two assets this is given by the formula: σ P = ³ x 2 σ 2 i + y 2 σ 2 j +2 xy σ i σ j ρ ij ´ 1 2 Use this formula to calculate the riskiness of each of the ten portfolios in panel B of the table(remember the excel program). brief answer see table. 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
12 13 14 15 16 17 18 19 15 17 19 21 23 25 27 29 31 33 35 R e t u r n Standard Deviation Set of Feasible Portfolios MinimumVariancePortfolio 70% Macrodonia 30% Microdonia Setof EfficientPortfolios Figure 1: (d) Using your calculations of the risk and return of the ten portfolios make a graph of the feasible set of portfolios. Which portfolio has the minimum risk? (e) Label the e cient set of portfolios in your graph. Explain why a portfolio that is comprised only of home assets would be a poor choice for residents of either country. brief answer A portfolio comprised of %100 Macrodonia assets has R p =13 . 38 and σ p =23 . 15 . Th i si sno te cient — you could get a higher return with the same amount of risk. For example, 40% Microdonia 60% Microdonia yields R p =16 . 17 and has the same level of risk. A portfolio comprised of all Microdonia assets would be optimal only for investors who did not care about risk, only return. If an investor was risk neutral her indi f erence curves would be horizontal (can you explain why) and thus would hold only Microdonia assets. An investor that was risk averse would choose a portfolio somewhere on the e cient frontier, but most likely a diversi f ed portfolio.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/11/2012 for the course ECONOMICS 434 taught by Professor Staff during the Fall '11 term at Pennsylvania State University, University Park.

Page1 / 9

homework1f09ans - Econ 434 Professor Ickes Fall 2009...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online