Question
Consider three securities with expected returns, standard deviations of returns and correlations between returns 1 = 0.10, 1 = 0.28, 12 = 21 = 0.10,
Consider three securities with expected returns, standard deviations
of returns and correlations between returns
1 = 0.10, 1 = 0.28, 12 = 21 = 0.10,
2 = 0.15, 2 = 0.24, 23 = 32= 0.20,
3 = 0.20, 3 = 0.25, 31 = 13= 0.25.
a) Given risk/standard deviation t = 1.5, find the corresponding
expected return u on the efficient frontier.
b)
In addtion to the three risky securities therein, assume now
2
a risk-free security with return R = 0.10 is available. Find the expected
return M and standard deviation M for the market portfolio, and derive
a linear equation for the capital market line in the expected return-risk
plane.
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