Question
6. Suppose that there are two assets: A and B. Asset A has expected return of 20% and standard deviation of * and Asset B
6. Suppose that there are two assets: A and B. Asset A has expected return of 20% and standard deviation of * and Asset B has expected return of 12% and standard deviation of *. Evaluate the following statements independently:
(a) "As B is strictly dominated by A in terms of total risk (standard deviation), there is no value in having B in portfolio formation." (Without doing any calculation) [1 point]
(b) "If the correlation coefficient between A and B = 1, it is always optimal to invest in A only." (Show your proof) [2 points]
(c) "If the correlation coefficient between A and B = -1, it is always optimal to invest in 50% in A and 50% in B when forming a minimum variance portfolio of the two." (Show your proof) [2 points]
(d) "Given that A= B=*, it is always optimal to combine half of A and half of B when forming a minimum variance portfolio of the two when (-1,1)." (Show your proof) [2 points]
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started