These two could be significant Assume that you and a business associate develop

These two could be significant assume that you and a

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points - the minimum variance portfolio and the maximum return portfolio. These two could be significant. Assume that you and a business associate develop an efficient frontier for a set of investments. Why might the two of you select different portfolios on the frontier? 10. The utility curves for an individual specify the trade-offs she is willing to make between expected return and risk. These utility curves are used in conjunction with the efficient frontier to determine which particular efficient portfolio is the best for a particular investor. Two investors will not choose the same portfolio from the efficient set unless their utility curves are identical. A three-asset portfolio has the following characteristics: The expected return on this three-asset portfolio is 13. Answer is C as expected return = (.15)(.50) + (.10).40) + (.06)(.10) = 12.1% An investor is considering adding another investment to a portfolio. To achieve the maximum diversification benefits, the investor should add, if possible, an investment that has which of the following correlation coefficients with the other investments in the portfolio? 14. Answer is A as adding an investment that has a correlation of -1.0 will achieve maximum risk diversification. 7 - 8
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CHAPTER 7 Answers to Problems 1. [E(R i )] for Lauren Labs Possible Expected Probability Returns Return 0.10 -0.20 -0.0200 0.15 -0.05 -0.0075 0.20 0.10 0.0200 0.25 0.15 0.0375 0.20 0.20 0.0400 0.10 0.40 0.0400 E(R i ) = 0.1100 3. Madison Sophie [R i -E(R i )] x Month Cookies(R i ) Electric(R j ) R i -E(R i ) R j -E(R j ) [R j -E(R j )] 1 -.04 .07 -.057 .06 -.0034 2 .06 -.02 .043 -.03 -.0013 3 -.07 -.10 -.087 -.11 .0096 4 .12 .15 .103 .14 .0144 5 -.02 -.06 -.037 -.07 .0026 6 .05 .02 .033 .01 .0003 Sum .10 .06 .0222 3(a). E(R Madison ) = .10/6 = .0167 E(R Sophie ) = .06/6 = .01 3(b). 3(c). COV ij = 1/5 (.0222) = .0044 3(d).
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  • Modern portfolio theory

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