Using mean-variance portfolio theory, prove that the efficient frontier becomes a straight line in the presence...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Using mean-variance portfolio theory, prove that the efficient frontier becomes a straight line in the presence of a risk-free asset. [3] Consider two independent assets, Asset A and Asset B, with expected retums of 6% pa and 11% pa and standard deviations of retums of 5% pa and 10% pa respectively. (ii) If only Assets A and B are available, calculate the equation of the efficient frontier in expected return-standard deviation space. [3] (v) A third Asset, Asset C, is risk-free and has an expected return of 4% pa. A Lagrangian function is to be used to calculate the equation of the new efficient frontier. Write down, but do not solve, the five simultaneous equations that result from this procedure. [3] (iv) Use your simultaneous equations to derive the relationship between x and X. the holdings of Assets A and B, on the new efficient frontier. [2] Hence derive the equation of the new efficient frontier in expected return- standard deviation space. [4] [Total 15] Using mean-variance portfolio theory, prove that the efficient frontier becomes a straight line in the presence of a risk-free asset. [3] Consider two independent assets, Asset A and Asset B, with expected retums of 6% pa and 11% pa and standard deviations of retums of 5% pa and 10% pa respectively. (ii) If only Assets A and B are available, calculate the equation of the efficient frontier in expected return-standard deviation space. [3] (v) A third Asset, Asset C, is risk-free and has an expected return of 4% pa. A Lagrangian function is to be used to calculate the equation of the new efficient frontier. Write down, but do not solve, the five simultaneous equations that result from this procedure. [3] (iv) Use your simultaneous equations to derive the relationship between x and X. the holdings of Assets A and B, on the new efficient frontier. [2] Hence derive the equation of the new efficient frontier in expected return- standard deviation space. [4] [Total 15]
Expert Answer:
Answer rating: 100% (QA)
To prove that the efficient frontier becomes a straight line in the presence of a riskfree asset using meanvariance portfolio theory we need to consid... View the full answer
Related Book For
Microeconomics Theory and Applications with Calculus
ISBN: 978-0133019933
3rd edition
Authors: Jeffrey M. Perloff
Posted Date:
Students also viewed these finance questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
The following additional information is available for the Dr. Ivan and Irene Incisor family from Chapters 1-5. Ivan's grandfather died and left a portfolio of municipal bonds. In 2012, they pay Ivan...
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
A dipole of 6.6 nC point charges arranged 0.16 cm apart is centered at the origin and oriented along the x-axis. The positive charge is on the negative x axis. How m energy is required to place a...
-
During metamorphism, what happens to the size of crystals?
-
Lancer, Inc. (a U.S.-based company), establishes a subsidiary in Croatia on January 1, 2019. The following account balances for the year ending December 31, 2020, are stated in kuna (K), the local...
-
True or false? By reducing financial leverage, we reduce the cost of debt and the cost of equity, and accordingly, the weighted average cost of capital? Why?
-
Granger Service Company, Inc., was organized by Ted Granger and five other investors. The following activities occurred during the year: a. Received $70,000 cash from the investors; each was issued...
-
11. A line that passes through the point (-1, 3) has a slope of 2. Find another point on the line. A. (0, 5) O B. (1, 4) C. (-3,2) O D. (1,5)
-
The Stone River Textile Mill was inspected by OSHA and found to be in violation of a number of safety regulations. The OSHA inspectors ordered the mill to alter some existing machinery to make it...
-
1 . You have $ 1 0 , 0 0 0 in savings and want to decide between two investment options. Bank X is offering compound interest of 5 % per year, and Bank Y is offering 6 % per year simple interest on a...
-
Davinci Manufacturing Co. has two production processes: Mixing and Canning departments. For the year 2020, Davinci budgeted total overhead of P4,965,000, of which P1,927,500 will be incurred in...
-
How much total energy does the light bulb transfer to the water? The bulb is 25 Watts, which means it transfers 25 J of energy for every 1 s. Show your work or explain your reasoning. Hint: On the...
-
Harris Inc. had the following transactions: 1. On May 1, Harris purchased parts from a Japanese company for a U.S. dollar equivalent value of $6,400 to be paid on June 20. The exchange rates were May...
-
1. Cigarettes and chewing gums are substitutes in consumption (but are unrelated in production). Consider the situation where the cigarette tax has been increased. The immediate effect is that the...
-
Describe a current, personal experience that is relevant to research methods. You can describe something that "passes for knowledge" that you observed at home, work, or the community; something you...
-
estion 8 rrect rk 1.00 out of 1.00 g question stion text e following information is available for adshaw Corporation and Newell Corporation: Bradshaw Corporation Newell Cor 2015 2014 2015 25 10 0 500...
-
Is times interest earned meaningful for utilities? Why or why not?
-
Jill possesses $160,000 worth of valuables. She faces a 0.2 probability of a burglary, where she would lose jewelry worth $70,000. She can buy an insurance policy for $15,000 that would fully...
-
Using the Challenge Solution's mathematical model, how much does Firm 1's profit (ignoring the subsidy) change as the subsidy, s, increases?
-
The demand functions for each of two goods depend on the prices of the goods, p1 and p2: Q1 = 15 - 3p1 + p2 and Q2 = 6 - 2p2 + p1. However, each supply curve depends only on its own price: Q1 = 2 +...
-
Using ficts in this chapter for Instruments du Rhone, assume the exchange rate on January 2. 2002, in Fxhibit 8.4 is \(\$ 0.9918\) / rather than \(\$ 1.0000\) / Recalculate Instruments du Rhone's...
-
Exhibits 8.7 and 8.8 in this chapter combine to create the consolidated balance sheet for Jefferson Controls, Inc. Instead of the rates used in the chapter, assume current rates are as reflected in...
-
Gwynn & Co. is a small firm of chartered accountants in Cardiff. The audit partner has been asked to make a proposal to Alhambra Bingo Clubs (ABC), a Cardiff-based company, which wants to change from...
Study smarter with the SolutionInn App