hw-2-sol - INVESTMENT ANALYSIS 70-492 Fall 2009 Suggested...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: INVESTMENT ANALYSIS 70-492 Fall 2009 Suggested Solution to Problem Set 2 Let be the proportion of wealth invested in Apple and (1- ) the proportion invested in Banana. The expected return and the standard deviation of the return on a portfolio of the two risky assets is E ( r P ) = E ( r A ) + (1- ) E ( r B ) (1) P = q 2 2 A + (1- ) 2 2 B + 2 (1- ) AB A B (2) a) AB =- . 5. Solve (2) for and substitute the value of into (1) to obtain E ( r P ). This gives = 0 . 252 ,E ( r P ) = 0 . 072. b) AB = 0. = 0 . 291 ,E ( r P ) = 0 . 0697. c) AB = 0 . 5. = 1 ,E ( r P ) = 0 . 02. d) Target standard deviation = 0.05. The expected return that he can obtain for each choice of the correlation coefficient is AB =- . 5 E ( r P ) = 0 . 0723 AB = 0 E ( r P ) = 0 . 0697 AB = 0 . 5 E ( r P ) = 0 . 0663 Hence he chooses AB =- . 5 because that choice gives him the highest expected return (the benefits of diversification are greater when two assets are negatively correlated).benefits of diversification are greater when two assets are negatively correlated)....
View Full Document

This note was uploaded on 01/20/2012 for the course INVESTMENT 101 taught by Professor Unknown during the Spring '08 term at Carnegie Mellon.

Page1 / 3

hw-2-sol - INVESTMENT ANALYSIS 70-492 Fall 2009 Suggested...

This preview shows document pages 1 - 2. Sign up to view the full document.

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