Reference no: EM132517592
In the Cha-am stock exchange, only two stocks are actually being traded:
Hua-Hin Corporation, a livestock company, that we will call HC for short and Ceramics Ayuthaya (CA), which as its name indicates trades, in ceramics and handy crafts.
The yearly average return of both companies in this stock market has been 18% for HC and 25% for CA. The risk, measured by the past standard deviation, has been 2% for HC and 4% for CA, with a correlation coefficient of 0.1 for both shares. In the Cha-am market, government short term treasury bills (T-bills) are also traded, with a present yearly return of 12%
a) Which is the expected return and total risk of the Cha-am market portfolio if we know the market risk premium, in equilibrium, is 8.5% and the CML equation?
b) John Dole has invested $1 million of his own money in a portfolio with the minimum risk for an expected return of 19%. Explain did he split his money between the different assets of the Cha am market.
c) J.R. Texas has invested $2 million of his own money in a portfolio with the highest expected return an expected risk of 5%, measured by the standard deviation of returns. How this portfolio will be split between the different assets?
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