# Mr x who has mean variance preferences considers the

• 15
• 100% (3) 3 out of 3 people found this document helpful

This preview shows page 8 - 11 out of 15 pages.

14.Mr. X, who has mean-variance preferences, considers the following two funds:Sure-thing fund:Expected Return=16%, Standard Deviation of Return=15%Sure-bet fund:Expected Return=12%, Standard Deviation of Return=8%The correlation between the funds’ returns is 0.7, and T-bill rate is 8%.Mr. Xforms portfolio Yusing the two funds, and then combines Y with T-bills.The weights of the funds within Y are:a.43.56% in Sure-thing fund and 56.44% in Sure-bet fundb.56.44% in Sure-thing fund and 43.56% in Sure-bet fundc.39.62% in Sure-thing fund and 60.38% in Sure-bet fundd.60.38% in Sure-thing fund and 39.62% in Sure-bet funde.50.00% in Sure-thing fund and 50.00% in Sure-bet fund
15.For the portfolio Y in the previous question (the portfolio formed by Mr. X), the standard deviation ofportfolio Y’s return is:
Foundations of Finance:Practice Midterm ExaminationProf.Alex Shapiro16.Mrs. R is using a model of expected returns, where the expected return next year depends on thecurrent value of the variable TRM (which measures a yield spread, defined as the yield on a 30-yearT-bond minus the yield on a 1-year T-note).Given the value of TRM, the expected one-year returnon stockiisγi+δiTRM,where TRM is in percentage points.For (risky) stocksA,B, andC, Mrs. R finds thatγA= 1%,γB= 2%,γC= 3%,δA= 2,δB= 1,When T-bond’s annualyield is 6% and T-note’s annualyield is 5%, based on Mrs. R’s model, theexpected returns onAandBsatisfy:δC= 3.BAB
9
17.Use the data in the previous question, and note that our risk averse Mrs. R (who uses the above modelfor conditional expectations) realizes that she has mean-variance preferences.She also has aninvestment horizon of one year and wants to construct a portfolio from either (i) 1-year T-notes andstockAonly, or (ii) 1-year T-notes and stockConly.CCCCto
Foundations of Finance:Practice Midterm ExaminationProf.Alex Shapiro10

Course Hero member to access this document

Course Hero member to access this document

End of preview. Want to read all 15 pages?

Course Hero member to access this document

Term
One
Professor
N/A
Tags
Practice Midterm Examination, Prof Alex Shapiro