Problem Set 2 Solutions(2)

# Levkoff c note that above we found that using

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ) Note that above we found that . Using variables indexed by , we have Using summation notation with (∑ ∑ ∑ ∑∑ 2. ) terms, we write: ∑ ∑ ∑ ( ∑ ( ) ( ) ) Economics 171 Problem Set 2 Solutions S. Levkoff Economics 171 Problem Set 2 Solutions S. Levkoff 3. a) Let us begin with Asset A. The expected return is given by: The variance is given by: Now we can compute the expected return and variance for Asset B. The variance is given by: The covariance between Assets A and B is given by: [ [ Note that So [ We could alternatively write: [ [ [ ]] Plugging in, we have: b) We first need to determine the optimal portfolio of Assets A and B. To do this, we minimize riskiness: We obtain the following first-order condition: Economics 171 Problem Set 2 Solutions S. Levkoff So, So if there is \$500 to spend on Assets A and B, then Asset A and should be allocated to Asset B. should be spent on...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online