finance 433 (pricipal of invesment)

(chapter 11 optimal Risky portfolio)

w1 = portfolio weight of asset

You are a fund manager who has managed two mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund. The current risk-free rate is 8% The expected return and standard deviation for both funds are: The correlation between the fund returns is 0.0004 a. Find the optimal risky portfolio based on two mutual funds. Calculate W_1(optimal), W_2(optimal) and the expected return and the standard deviation of the optimal risky portfolio. Use at least 4 decimal digits for weights, expected return, and standard deviation. b. Find the minimum variance portfolio based on two mutual funds. Calculate W_1(min), W_2(min) and the expected return and the standard deviation of the minimum variance portfolio. Use at least 4 decimal digits for weights, expected return, and standard deviation. c. Draw the investment opportunity set of the two risky funds using the optimal risky portfolio and the minimum variance portfolio. Also draw a tangent from the risk-free rate to the opportunity set. Identity (label) the expected returns and the standard deviations of the minimum variance portfolio and the optimal risky portfolio on the graph. Label each point including the portfolio with 100% invested in stock and the other portfolio with 100% invested in bond. You are a fund manager who has managed two mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund. The current risk-free rate is 8% The expected return and standard deviation for both funds are: The correlation between the fund returns is 0.0004 a. Find the optimal risky portfolio based on two mutual funds. Calculate W_1(optimal), W_2(optimal) and the expected return and the standard deviation of the optimal risky portfolio. Use at least 4 decimal digits for weights, expected return, and standard deviation. b. Find the minimum variance portfolio based on two mutual funds. Calculate W_1(min), W_2(min) and the expected return and the standard deviation of the minimum variance portfolio. Use at least 4 decimal digits for weights, expected return, and standard deviation. c. Draw the investment opportunity set of the two risky funds using the optimal risky portfolio and the minimum variance portfolio. Also draw a tangent from the risk-free rate to the opportunity set. Identity (label) the expected returns and the standard deviations of the minimum variance portfolio and the optimal risky portfolio on the graph. Label each point including the portfolio with 100% invested in stock and the other portfolio with 100% invested in bond