Solution_Practice Problems for Midterm

A which satisfy this equation these are a 15585 and

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Unformatted text preview: or wants to a achieve a standard deviation of 0.05. Therefore, setting ! p = 0.05 in the above expression and solving for ! a , we obtain two possible values for ! a which satisfy this equation. These are ! a =1.5585 and ! a =0.2906. Substituting these values for ! a into the expression for expected return above, we get E ( Rp ) = 1.5585 ! .02 + (1 " 1.5585) ! .09 = "0.0191 = "1.91% for ! a =1.5585 and E ( Rp ) = 0.2906 ! .02 + (1 " 0.2906 ) ! .09 = 0.0697 = 6.97% for ! a =0.2906. Since the latter value of ! a gives a higher expected return, this is the optimal portfolio for the investor. 3. Since S...
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This document was uploaded on 03/12/2014.

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