Question
2. Lockheed has a standard deviation of 6% and Intel has a standard deviation of 10%. The correlation () between Lockheed and Intel is 0.
2. Lockheed has a standard deviation of 6% and Intel has a standard deviation of 10%. The correlation () between Lockheed and Intel is 0.
a. Complete the following table and develop a graph of the investment opportunity (feasible) set of these two assets. Show your work and make a precise (to scale) graph. Note: If using Excel to graph, the scale on both axes must be the same or the graph will be incorrect.
% of Portfolio In Lockheed % of Portfolio in Intel Expected Return on Portfolio Portfolio Portfolio Standard Deviation
100 0
75 25
50 50
25 75
0 100
b. Now add to the graph the capital market line (CML). No calculations are required.
c. Explain the difference between the CML and the SML (security market line).
d. Draw a set of indifference curves somewhere to the right of the tangency point between the CML and the efficient frontier. Explain how you, as a rational investor, will choose a utility maximizing portfolio:
i. In the absence of capital markets (i.e. no CML)
ii. With capital markets (includes the opportunity to borrow and lend at the risk free rate)
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