Question
A) Would you use an arithmetic average or a geometric average to estimate expected asset returns for use in Markowitz-style portfolio optimisation? Explain your answer.
A) Would you use an arithmetic average or a geometric average to estimate expected asset returns for use in Markowitz-style portfolio optimisation? Explain your answer.
B) The continuously compounded rate of return on an investment with a time to maturity of 5 years is 10%. Compute the annualised quarterly-compounding rate of return for that same investment, expressing your answer in percentages to 2 decimal places. Show your working.
C) The rate of return on two assets has a correlation of -0.5. In a fully-invested variance-minimising portfolio consisting of the two assets, would the weights on both assets be positive? Explain your answer, assuming that the rates of return on the two assets have a joint normal distribution.
D) Describe two assumptions that can both be used to justify Markowitz-style portfolio optimisation? Indicate reasons why those assumptions might not be appropriate.
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