Which pairs if any of expected returns and standard deviations on the red line

# Which pairs if any of expected returns and standard

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Which pair(s), if any, of expected returns and standard deviations on the red line can be obtained by investing in the two risky assets A & B and in the riskless asset? Give an intuitive answer. Try to explain why you believe in your result? Kathrin Glau, Financial Mathematics III, Semester B 2018 435
Portfolio of Two Risky & One Riskless Asset % 2 ( - 1 , 1) The point (0 , μ rf ) that represents the riskless asset in the graph is attainable. This is the only attainable point on the red line .... Why? ... Let us first look at another case: Kathrin Glau, Financial Mathematics III, Semester B 2018 436
Portfolio of Two Risky & One Riskless Asset % 2 ( - 1 , 1) Example Exam Question V.107 0 B A 0 mu rf B A ( A , A ) ( B , B ) riskless asset Which point(s) on the red line are attainable? Which pair(s), if any, of expected returns and standard deviations on the red line (segment) can be obtained by investing in the two risky assets A & B and in the riskless asset? Why? Kathrin Glau, Financial Mathematics III, Semester B 2018 437
Portfolio of Two Risky & One Riskless Asset % 2 ( - 1 , 1) 0 B A 0 mu rf B A ( A , A ) ( B , B ) riskless asset Which point(s) on the red line are attainable? All points on the red line are attainable. The line represents all portfolios obtained by investing a portion in asset A and a portion in the riskless asset. We have already seen that such portfolios are represented by straight lines connecting the pairs of the two assets. Kathrin Glau, Financial Mathematics III, Semester B 2018 438
Portfolio of Two Risky & One Riskless Asset % 2 ( - 1 , 1) Example Exam Question V.108 0 B A 0 rf B A ( A , A ) ( B , B ) riskless asset Which point(s) on the red line are attainable? Which pair(s), if any, of expected returns and standard deviations on the red line (segment) can be obtained by investing in the two risky assets A & B and in the riskless asset? Why? Kathrin Glau, Financial Mathematics III, Semester B 2018 439
Portfolio of Two Risky & One Riskless Asset % 2 ( - 1 , 1) 0 B A 0 rf B A ( A , A ) ( B , B ) riskless asset Which point(s) on the red line are attainable? All points on the red line are attainable. The line represents all portfolios obtained by investing a portion in asset B and a portion in the riskless asset. Kathrin Glau, Financial Mathematics III, Semester B 2018 440
Portfolio of Two Risky & One Riskless Asset % 2 ( - 1 , 1) Example Exam Question V.109 0 B =0.05 A =0.07 0 mu rf B =0.07 A =0.1 ( A , A ) ( B , B ) riskless asset Which point(s) on the red line are attainable? Which pair(s), if any, of expected returns and standard deviations on the red line (segment) can be obtained by investing in the two risky assets A & B and in the riskless asset? Why? Kathrin Glau, Financial Mathematics III, Semester B 2018 441
Portfolio of Two Risky & One Riskless Asset % 2 ( - 1 , 1) 0 B =0.05 A =0.07 0 mu rf B =0.07 A =0.1 ( A , A ) ( B , B ) riskless asset Which point(s) on the red line are attainable? All points on the red line are attainable. The blue star represents a portfolio obtained by investing a portion x A in the asset A and the rest in asset B. We call this portfolio P AB ( x A ).

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