Answered step by step
Verified Expert Solution
Question
1 Approved Answer
4 Problem1: Use Excel to solve this problem Consider the following 2 securities with: - Expected rate of return on security 1 = 0.10 -
4 Problem1: Use Excel to solve this problem Consider the following 2 securities with: - Expected rate of return on security 1 = 0.10 - Expected rate of return on security 2 = 0.20 - Variance of security 1 = 0.09 - Variance of security 2 = 0.16 Assume the coefficients of correlation are: -1.0, -0.5, -0.75, 0, 0.5, 0.75, 1.0 Use Excel and answer the following questions: a) You have to select a security for investment which one will you select? b) If you have to obtain the Global minimum variance portfolio for each coefficient of correlation, what will be your investment fractions? c) Which of the combinations you obtain in b) give you a diversified portfolio. Check whether the conditions for diversification are satisfied. d) For each coefficient of correlation draw the efficient frontier on the same graph. Make sure that the fractions, which you have obtained for minimum variance portfolio in b, are part of your graph. e) Does the graph obtain in d satisfies the answer which you have given in c. Problem2: Use Calculator to do this problem Consider the following information on two securities Expected rate of return on Security Ri = 0.10 Expected rate of return on Security Rj = 0.20 Variance of ROR of security Ri = 0.16 Variance of ROR of security Rj = 0.25 Covariance between Ri and Rj = -0.04 (minus 0.04) Obtain the 1) the investment fractions to obtain the Global Minimum Variance Portfolio 2) Expected rate of return on Global Minimum Variance Portfolio 3) Variance of Global Minimum Variance Portfolio 4) Is your portfolio diversified? Whatever your answer you must explain the reason for your answer. 1 5) If you need to draw a graph how the graph of the efficient frontier will look for the correlation structure given above. (Draw a graph to discuss your answer). Do not forget to write down the legends on X and Y axis) 6) What is the threshold coefficient of correlation above which diversification will not be possible? 2
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started