assignment3 solutions

325 0495 03115 8 stdevr equal weighted

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Unformatted text preview: weighted) = 0.3(2.5%) + 0.4(9.5%) + 0.3(11.5%) = 8% Stdev(r equal-weighted) = [0.3(2.5%-8%)² + 0.4(9.5%-8%)² + 0.3(11.5%-8%)²]0.5 = 3.7% d) Any risk averse investor (i.e., an investor with k>0) prefers the equal weighted portfolio because it has higher mean return and lower variance than bonds. 4. See the Excel spreadsheet. The first order condition to find the minimum variance portfolio: dVar(rp)/dw = wVar(ri) – (1-w)Var(rj) + (1-2w)Cov(ri,rj) = 0 which implies that w min = [Var(rj) - Cov(ri,rj)] /[Var(ri) + Var(rj) - 2Cov(ri,rj)] Substituting the numbers, the result is 0.55...
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