Question
1. Consider the following assets in which to potentially invest: E[r] [r] Fund ABC 10% 18% 0.3 Fund DEF 9% 25% 0.3 Government Bond 4%
1. Consider the following assets in which to potentially invest:
E[r] | [r] | ||
Fund ABC | 10% | 18% | 0.3 |
Fund DEF | 9% | 25% | 0.3 |
Government Bond | 4% | 0% | - |
a) Without doing any calculations, what which risky asset, ABC or DEF, would you expect to hold more of in the optimal risky portfolio? b) What is the weight of ABC in the optimal risky portfolio? c) For an investor with a risk-aversion parameter A equal to 3, what is weight of the risk-free asset in the optimal complete portfolio? d) For an investor with A<3, do you expect she will hold more, less, or the same amount of the risk-free asset in her optimal complete portfolio compared to the investor in (c)?
2. Given the following estimates:
State | Probability | High Growth (rG) | Blue Chip (rB) |
Expansion | 0.3 | 15% | 6% |
normal | 0.4 | 8% | 5% |
recession | 0.3 | -8% | -3% |
Question : What is the correlation (not covariance!) between the returns of the two firms?
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