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In this exercise you will be guided to understand the logic behind optimal asset allocation between a riskless asset and some risky securities, according to
In this exercise you will be guided to understand the logic behind optimal asset allocation between a riskless asset and some risky securities, according to their different possible correlation coefficients. Consider the data reported in the table below. wi and wz denote the weights that each of the three assets have in, respectively, portfolio 1 and portfolio 2. W1 W2 Risk-free asset RF 75% 15% 2% 0% Stock A 45% 30% 8% 10% Stock B -20% 55% 16% 20% E[r] o a. We aim to construct a portfolio P that invests 6,000 USD in portfolio 1 and 4,000 USD in portfolio 2. What is the amount of money invested in each of the three asset in portfolio P? b. Compute the expected return and the standard deviation of portfolio P, assuming that all three securities are uncorrelated. C. Compute the standard deviation of portfolio P if the asset correlation coefficient between stock A and stock B were 0.8. Is this result expected or surprising? d. A friend of yours, who is a mean-variance investor, tells you that she would like to invest only in the riskless asset and stock B. She is quite risk-averse and is willing to bear a risk not higher than 5% in terms of standard deviation. Can she achieve a return of at least equal to that of portfolio Pin expectation? What would you recommend to her? e. Suppose that the correlation between stock A and stock B is -1. Is the market in equilibrium
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