Question
A.Use the following information to answer the questions below: SecurityReturn(S1)Return(S2) A16%20% B12%25% Risk-free asset return = 4%; S1 is State-1 and S2 is State-2; Prob(S1)
A.Use the following information to answer the questions below:
SecurityReturn(S1)Return(S2)
A16%20%
B12%25%
Risk-free asset return = 4%;
S1 is State-1 and S2 is State-2;
Prob(S1) = 0.6; Prob(S2) = 0.4
i).What is the expected return on Security A and the expected return on Security B?
ii).What is the standard deviation of returns of an equally weighted portfolio made up of Security A and Security B?
(continued)
A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5%. The probability distributions of the risky funds are:
Expected Return Standard Deviation
Stock fund (S) 15% 32%
Bond fund (B) 9 23
The correlation between the fund returns is 0.10.
What is the Sharpe ratio for the minimum variance portfolio (MVP)?
[Hint: The minimum-variance CAL is the line joining the risk-free asset to the minimum-variance portfolio (MVP). Now calculate slope of line after characterizing the minimum-variance portfolio.]
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