Question
Again, assume that there are two i nvestors, one being rational and the other one being overconfident. Both investors correctly estimate the expected return and
Again, assume that there are two i
nvestors, one being rational and the other one being
overconfident. Both investors correctly estimate the expected return and volatility of the market
portfolio, but they differ in their estimates about a stock X. All estimates are given below. The
risk f
ree rate is 4%.
Investor
Asset
E(r)
Rational
X
12.50%
50%
0.5
Overconfident
X
12.50%
30%
0.5
Market
Portfolio
16%
20%
a.
Please calculate the optimal weight to invest in stock X for each investor, in their optimal
risky portfolio (comprising of the market portfolio and stock X).
Notes: the calculation is introduced in lecture 7.
b.
Compare your results in part
a
.
for two investors. Can you make any inference regarding
the relation between overconfide
nce and under
-
div
ersification?
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