Question
As an individual investor, you have three funds to invest into. The first is an equity fund, the second is a corporate bond fund, and
As an individual investor, you have three funds to invest into. The first is an equity fund, the second is a corporate bond fund, and the third is a T-bill money-market fund (your risk-free asset). Assume your personal risk aversion is 0.06 (A=0.06). The correlation between the equity fund and the bond fund returns is 0.1.
Fund | Expected return | Risk |
Equity fund | 16% | 38% |
Corporate bond fund | 7% | 25% |
T-bill money market fund | 3% |
|
- Find weights of the equity and corporate bond funds in the minimum variance portfolio.
2.Using weights calculated in Question 1, compute the expected return (E[r]) and the risk (standard deviation) of the minimum variance portfolio.
3.Find weights of the equity and corporate bond funds in the optimal portfolio.
4.Using weights calculated in Question 3, find the expected return (E[r]) and risk (standard deviation) of the optimal portfolio.
5.Compute the slope of the Capital allocation line (CAL) using the optimal portfolio from questions 3 and 4 as your risky portfolio.
6.Using your personal risk aversion (A=0.06) and the optimal portfolio as the risky portfolio, find the weights of the optimal portfolio and of the risk-free asset in the complete portfolio.
7.Using weights calculated in Question 6, compute the expected return (E[r]) and the risk (standard deviation) of your complete portfolio.
8.Calculate weight of the equity and corporate bond fund in the complete portfolio calculated in Questions 6 and 7.
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