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11. Suppose that there are two assets, A and B, and their retums are derived by the two-factor model below: R = a +bal+by+ The
11. Suppose that there are two assets, A and B, and their retums are derived by the two-factor model below: R = a +bal+by+ The first factor has an expected rate of return of 1,5% and a standard deviation 0,3%. The second factor has an expected rate of return of lz=12% and a standard deviation 02=5%. The returns between the two factors and the returns between the idiosyncratic component of each asset and each factor are uncorrelated. The risk-free rate of return is RF = 2%. The table below summarises the coefficients a, b, bz, and the standard deviation of the error term & for each asset: + bu Asset A Asset B a 0.4% 1.4% bal 0.5 0.1 al 22% 0.2 a. Estimate the expected returns and the standard deviation of returns for the two assets. (5 marks] b. Find the optimal risky portfolio and calculate its expected return and its standard deviation of returns. (5 marks) c. Mrs. H has an initial wealth Wo=10,000,000. Her state-specific utility as a function of her wealth is given by the equation below. Compute her overall optimal portfolio by investing her wealth in assets A, B and the risk-free asset U,,(w) = w 25,000,000 wal 11. Suppose that there are two assets, A and B, and their retums are derived by the two-factor model below: R = a +bal+by+ The first factor has an expected rate of return of 1,5% and a standard deviation 0,3%. The second factor has an expected rate of return of lz=12% and a standard deviation 02=5%. The returns between the two factors and the returns between the idiosyncratic component of each asset and each factor are uncorrelated. The risk-free rate of return is RF = 2%. The table below summarises the coefficients a, b, bz, and the standard deviation of the error term & for each asset: + bu Asset A Asset B a 0.4% 1.4% bal 0.5 0.1 al 22% 0.2 a. Estimate the expected returns and the standard deviation of returns for the two assets. (5 marks] b. Find the optimal risky portfolio and calculate its expected return and its standard deviation of returns. (5 marks) c. Mrs. H has an initial wealth Wo=10,000,000. Her state-specific utility as a function of her wealth is given by the equation below. Compute her overall optimal portfolio by investing her wealth in assets A, B and the risk-free asset U,,(w) = w 25,000,000 wal
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