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Unformatted text preview: P conditional on N ) = Pr( P ) Pr( N ) = : 172 : 300 = 0 : 57 According to the markets, at that date and time, Obama was more electable. 3. An investor has access to two risky assets P and Q with the following statistical properties: E ( r p ) = 7% ; & p = 6% ; E ( r q ) = 8% ; & q = 8% : The correlation coecient between the two asset returns is zero and the risk-free rate of interest is 5% : (a) The reward-to-variability ratios are 1 3 for asset P and 3 8 for asset Q; so Q has the higher ratio. (b) The expected return of a portfolio consisting of equal weights in the two risky assets is E ( r ) = 1 2 (0 : 07) + 1 2 (0 : 08) = 0 : 075 = 7 : 5% and the standard deviation is & = s 1 4 (0 : 0036) + 1 4 (0 : 0064) = 0 : 05 = 5% (c) No, this is not possible. For every combination of bills and P; there exists a combination of bills and Q that has a higher expected return for the same risk. 2...
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This note was uploaded on 04/07/2008 for the course ECON v3025 taught by Professor Sethi during the Spring '08 term at Columbia.
- Spring '08