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459hw04

# 459hw04 - and a foreign risky assets i.e d i r 1 and f i r...

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Brigham Young University Department of Economics Economics 459 - International Finance Homework #4 Due 2/8 Name: Financial Portfolios 1. Consider an investor with two possible assets. Recalling our classroom discussion of optimal portfolios, write down the optimization problem this investor needs to solve. Assume mean/variance utility. Write down the first order conditions. Solve these conditions for the optimal portfolio weights as functions of the statistical properties of the two asset returns. What are the optimal weights under the following conditions: a) identical expected values and variances, covariance of zero: b) identical expected values and variances, non-zero covariance: c) same variance, zero covariance, expected value of asset 1 greater than asset 2:

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2. Using your results from problem one, assume that the two real assets available are a domestic risky asset,
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Unformatted text preview: and a foreign risky assets.; i.e. d i r 1 and f i r 2 . Assume the forward exchange markets do not exist. Assume inflation is also risky. Write down the expected values, variances and covariance of both of these assets. What are the optimal weights under if d i and f i have identical means and variances, but covariances of d i , f i , & are zero: 3. Finally assume that the shares purchased must equal to the shares available. In this case the price of foreign exchange will adjust to make supply equal to demand. Holding the variance of the exchange rate appreciation fixed and assuming half the world portfolio is domestic and half is foreign, solve the above equations for the equilibrium value of the expected appreciation in exchange rates....
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459hw04 - and a foreign risky assets i.e d i r 1 and f i r...

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