Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 2: Suppose John and Kim are thinking of combining their investment portfolios. Both portfolios have the same two assets (A and B) with the

Question 2: Suppose John and Kim are thinking of combining their investment portfolios. Both portfolios have the same two assets (A and B) with the following covariance matrix (the first row and the first column are for asset A).

0.09

0.03

0.03

0.04

The expected return of asset A is 10% and the expected return of asset B is 7%. Suppose the riskless asset has an expected return of 3.0%. John has 65% invested in asset A, while Kim has 75% invested in asset A. The value of Johns portfolio is $75,000 and the value of Kims portfolio is $95,000.

What are the values of investments in the two assets after combining the portfolios? (3)

What are the weights of the two assets in the portfolio after combining the portfolios? (3)

What are the expected return and the standard deviation of the combined portfolio? (2+4)

What is the correlation between assets A and B? (2)

What is the Sharpe Ratio of the combined portfolio? (2)

If the goal is to earn an annual return of 8%, what should be the allocations to the combined portoflio and the risk-free asset? (5)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Public Finance

Authors: Laurence S. Seidman

1st Edition

0073375748, 978-0073375748

More Books

Students also viewed these Finance questions

Question

How can the Internet be helpful in a job search? (Objective 2)

Answered: 1 week ago