Solution_Practice Problems for Midterm

c d 2 c 1 c c d 0 c c 1

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Unformatted text preview: tocks C and D have a correlation coefficient of  ­1, we can form a portfolio of these stocks that has a zero standard deviation. If the proportion of wealth invested in Stock C is ! c , this weight satisfies: 2 2 2 0 = ! p = " c! c2 + (1 ! " c ) ! d ! 2" c (1 ! " c ) ! c! d " 0 = (" c! c + (1 ! " c ) ! d ) !d 0.12 = = 0.6 ! c + ! d 0.08 + 0.12 The expected return on this portfolio is then E ( Rp ) = 0.6 ! .04 + (1 " 0.6 ) ! .06 = 0.048 = 4.8% . Therefore, the only possible value of " "c = the risk free rate such that there is no arbitrage is 4.8% since the risk free rate also has...
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This document was uploaded on 03/12/2014.

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