Reference no: EM132643736
1. The (annual) expected return and standard deviation of returns for 2 assets are as follows: Asset A Asset B E[r] 10% 20% SD[r] 30% 50% The correlation between the returns is 0.15.
a. Calculate the expected returns and standard deviations of the following portfolios: (i) 80% in A, 20% in B (ii) 50% in A, 50% in B (iii) 20% in A, 80% in B
2. In addition to the information in Q.3, assume that the (annual) risk-free (T-bill) rate is 4%.
a. Calculate the expected returns and standard deviations of the following portfolios: (i) 75% in the risk-free asset, 25% in B (ii) 25% in the risk-free asset, 75% in B (iii) 50% in the risk-free asset, 50% in the portfolio in Q.3a(ii)
c. Find the weights (T-bill, asset A, asset B) for a portfolio with the same expected return as asset B, using only a combination of the risk-free rate and the portfolio in Q.3a(ii)? What is the standard deviation of this portfolio? What is the correlation of this portfolio with the portfolio in Q.4a(iii)?
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