There are three securities available for investment: Security A has an expected return of 10% and standard deviation of 20%; Security B has an expected return of 15% and standard deviation of 25%; Security C expected return of 8% and standard deviation of 0%. The covariance between the returns on the Security A and the Security B is -0.05.
a)What is the lowest level of risk (standard deviation) you can achieve by investing in the Security A and the Security B only? Show how you can create such portfolio.
b)What is the equation of the CAL connecting Security A and Security C? What is the reward-to-variability (Sharpe) ratio associated with this CAL?
c)If you decide to invest $50 in Security A and $150 in Security B, what are the expected return and the standard deviation of the resulting portfolio?
d)What should be a degree of risk aversion of an investor who is indifferent between investing in the Security A and the Security B?
There are three securities available for investment: Security A has an expected return of 10% and standard deviation of 20%; Security B has an expected return of 15% and standard deviation of 25%; Security C expected return of 8% and standard deviation of 0%. The covariance between the returns on the Security A and the Security B is -0.05.
a)What is the lowest level of risk (standard deviation) you can achieve by investing in the Security A and the Security B only? Show how you can create such portfolio.
b)What is the equation of the CAL connecting Security A and Security C? What is the reward-to-variability (Sharpe) ratio associated with this CAL?
c)If you decide to invest $50 in Security A and $150 in Security B, what are the expected return and the standard deviation of the resulting portfolio?
d)What should be a degree of risk aversion of an investor who is indifferent between investing in the Security A and the Security B?
Related questions
| Security F has an expected return of 11.70 percent and a standard deviation of 44.70 percent per year. Security G has an expected return of 16.70 percent and a standard deviation of 63.70 percent per year. |
| a. | What is the expected return on a portfolio composed of 23 percent of Security F and 77 percent of Security G? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) |
| Expected return | % |
| b. | If the correlation between the returns of Security F and Security G is .18, what is the standard deviation of the portfolio described in part (a)? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) |
| Standard deviation | % |
