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Consider three risky assets with the following attributes: Asset 1 Expected Return Standard Deviation 12% 22% Asset 2 5% 10% Asset 3 15% 18% The
Consider three risky assets with the following attributes:
Asset 1 | Expected Return | Standard Deviation |
12% | 22% | |
Asset 2 | 5% | 10% |
Asset 3 | 15% | 18% |
The risk-free rate is 2%. The covariance matrix for the assets is:
Asset 1 Asset 2 Asset 3 | Asset 1 | Asset 2 | Asset 3 |
0.0484 | 0.0110 | 0.0198 | |
0.0110 | 0.0100 | 0.0090 | |
0.0198 | 0.0090 | 0.0324 |
Assume short-selling is allowed.
- What is the correlation between Asset 1 and Asset 2?
- If one cannot invest in the risk-free security, what is the best portfolio that earns a 13% expected return?
- Explain concisely in a sentence or two how you solved part (b).
- What are the weights, expected return and standard deviation of the tangency portfolio?
- Explain concisely in a sentence or two how you solved part (d).
- If one can invest in the risk-free security (either long or short), what is the best portfolio you can hold that earns a 13% expected return? Specify the weights in the risk-free asset, Assets 1, 2 and 3 as well as the portfolio’s standard deviation.
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Expected Return Standard Deviation variance Asset 1 12 22 00484 Asset 2 5 10 001 Asset 3 15 18 00324 ...Get Instant Access to Expert-Tailored Solutions
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