View the step-by-step solution to:

Question

You are constructing an investment portfolio. You can invest in American Airlines, Southwest Airlines, and

T-bills. The expected return on American is 7% with a standard deviation of 12%. The expected return on Southwest is 13% with standard deviation of 24%. The correlation coefficient between American and Southwest is .2. The T-bill rate is 2%.


(a) Initially you mistakenly assume that you can only invest in one of the airlines and T-bills. Which airline should you invest in? (Hint: Think about slopes of lines in risk-return space)


(b) Now your realize you can invest in both of the airlines and you want to construct a portfolio by investing solely in the two airlines and yielding an expected return of 10%.

(i) What are the portfolio weights on the two airlines?

(ii) What is the standard deviation of this portfolio? 

Recently Asked Questions

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question
Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes