FINE 441 Midterm Summer 2013 Solutions

Elmosalphais2andyour

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Unformatted text preview: re allowed to own any foreign stocks. Assume further that the CAPM holds within Orca. What can you say about the relative weighting of the Orca Gold Mining sector and Orca Healthcare sectors within any optimal portfolio? Explain briefly. CAPM holds within Orca so the Orca 500 is the tangency portfolio. So any optimal portfolio will have (within the risky component of the portfolio) a 50‐50 allocation to both sectors. Although Gold Mining has a high Beta with respect to the Orca 500, it would have a high enough expected return to justify a 50% allocation. b) Ignore the assumptions in part a. Instead, assume that in general foreign investors are allowed to invest in Orca and that Orca residents are allowed to invest abroad. Assume further that the CAPM holds at the global level. But, your specific fund cannot invest any funds abroad. What can you say now about the relative weighting of the Orca Gold Mining sector and Orca Healthcare sectors within any optimal portfolio? A 50‐50 allocation to both sectors would not be justified now because the expected returns to Orca H...
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