Posted: January 10th, 2017
portfolio is σ 2 | = w 2σ | 2 | + w 2σ | 2 | + 2w w | 2 | ρ | 1, 2 | σ σ | 2 | ) | ||
p | 1 | 1 | 2 | 2 | 1 | 1 | |||||||
(a) | Calculate the rates of return and standard deviations for the above | [35] | |||||||||||
two portfolios, and draw an approximate diagram illustrating the | |||||||||||||
possible return and risk combinations (opportunity set). | |||||||||||||
(b) | What difference would the availability of a risk-free asset yielding 5 | [35] | |||||||||||
percent per annum make to the risk return frontier you have drawn | |||||||||||||
in (a) above? What are the benefits to investors of the risk free | |||||||||||||
asset. State all assumptions you make (supporting calculations are | |||||||||||||
not required). | |||||||||||||
(c) | Discuss the extension of the two asset portfolio to a many asset | [30] | |||||||||||
portfolio. What conclusions can be drawn? |
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