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2. Multiple assets are traded in the market. Financial analysts calculate that A and B are two portfolios in the minimum variance portfolio set.
2. Multiple assets are traded in the market. Financial analysts calculate that A and B are two portfolios in the minimum variance portfolio set. Their characteristics are described in the table below. In addition, the correlation coefficient between A and B 0.25. is PAB = (a) Martin and Lucy are two risk-averse investors. Suppose that Martin is less risk averse than Lucy, will Lucy put a higher weight on asset A than Martin? Now, suppose that there is a risk-free asset F, whose rate of return is 0.02. 1 Portfolio Expected rate of return (E(rp)) Standard Deviation () A B 0.1 0.3 1 4 (b) In their optimal risky portfolios, will Lucy put a higher weight on asset A than Martin? [Hint: the risky portfolio does not include the risk-free asset.] (c) Lucy has a weird preference. She will choose one and only one risky asset to construct a new portfolio with the risk-free asset. Will she choose A or B?|
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