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1. You consider investing in two mutual funds (ie. particular portfolios 1,2) with the parameters as described in Table 1. The funds are valued in

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1. You consider investing in two mutual funds (ie. particular portfolios 1,2) with the parameters as described in Table 1. The funds are valued in a market where investors can borrow and lend, using ZCB, at a risk free rate of 5%, have common beliefs, and require an excess return of 8% for holding the market portfolio. Beta Volatility Fund 110.8 Fund 211.2 20% 32% Table 1: Fund betas and volatilities for Problem (a) The mth asset has Bm Cov(m,)Var*) where rm,r are the (random) returns of the security and market portfolio respectively. In a similar manner, for a given portfolio , we define (A) Cov(r(), r*)/Var(r), and these are the values given in Table 1. With denoting the vector of security 's, show that (A) A3 and hence the portfolio satisfies the CAPM formula (b) If, for a given target return, you are volatility averse, which of the two funds do you prefer and why? 1. You consider investing in two mutual funds (ie. particular portfolios 1,2) with the parameters as described in Table 1. The funds are valued in a market where investors can borrow and lend, using ZCB, at a risk free rate of 5%, have common beliefs, and require an excess return of 8% for holding the market portfolio. Beta Volatility Fund 110.8 Fund 211.2 20% 32% Table 1: Fund betas and volatilities for Problem (a) The mth asset has Bm Cov(m,)Var*) where rm,r are the (random) returns of the security and market portfolio respectively. In a similar manner, for a given portfolio , we define (A) Cov(r(), r*)/Var(r), and these are the values given in Table 1. With denoting the vector of security 's, show that (A) A3 and hence the portfolio satisfies the CAPM formula (b) If, for a given target return, you are volatility averse, which of the two funds do you prefer and why

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