Hi I want to know the anwer and process of question 2.

Finance Discipline Group UTS Business School 25503 Investment Analysis Tutorial 4 1. Consider a market containing two risky assets with the following expected returns and standard deviations of returns: i 20% 10% ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m i 14% 8% r1 r2 Assume that the correlation between their returns is 1,2 = 0.5 and that a bond delivering a risk-free return of rF = 5% is also available for investment. As a fund manager, you've been instructed to construct an efficient portfolio P from these three instruments yielding an expected return of P = 10%. (a) Formulate and solve the relevant Markowitz problem using the method of Lagrange multipliers. (b) Does the portfolio P lie above or below the tangency portfolio in meanstandard deviation space? Justify your answer. sh Th is (c) Write down the equation for the efficient frontier and plot your result in meanstandard deviation space. Your diagram should indicate the positions of the two risky assets and the bond as well as portfolio P . 1 https://www.coursehero.com/file/23221906/tut0442/ 2. Consider a financial market consisting of three risky assets and a risk-free asset. For the risky assets, the vector of expected returns, the variance-covariance matrix, and the inverse variance-covariance matrix are 0.10 0.02 0.02 0.02 200 100 50 = 0.06 , = 0.02 0.03 0.02 , and 1 = 100 100 0 . 0.20 0.02 0.02 0.04 50 0 50 The return of the risk-free asset is rF = 0.05. (a) Calculate the values of A, B, C, and . (b) What are the mean return and standard deviation of returns for the global minimum variance portfolio without the risk-free asset? ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m (c) What are the mean return and standard deviation of returns for the tangency portfolio? (d) What are the portfolio weights for the tangency portfolio? (e) Use the One Fund Theorem to determine the weights and variance of returns for the portfolio P on the MVS with an expected return of 20%. sh Th is (f) Use the above values to produce rough plots, on the same set of axes, of the MVS (with and without the risk-free asset). Indicate the positions of the underlying assets and the portfolios G, T , and P in your diagram. 2 https://www.coursehero.com/file/23221906/tut0442/ Powered by TCPDF (www.tcpdf.org)