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Question 5 (20 points) An economy contains 20 assets. For each asset, the expected return is 10% and the variance of returns is 0.5. In
Question 5 (20 points) An economy contains 20 assets. For each asset, the expected return is 10% and the variance of returns is 0.5. In addition, the covariance of returns between any pair of assets is 0.15. Minimum-variance portfolio M has E[rm] = 0.10 and om = 70.1675 = 0.409. A risk-free asset exists which can be loaned at 5% and borrowed at 7%. (a) What is the standard deviation of returns for a portfolio with 20% invested in each of 4 assets, and 4% invested in each of another 5 assets? (b) What additional expected return could be obtained from switching from the portfolio in (a) to a "passive" portfolio with the same total risk? [Here, a "passive" portfolio is to be interpreted as a combination of the risk-free asset and the minimum-variance portfolio of risky assets). Question 5 (20 points) An economy contains 20 assets. For each asset, the expected return is 10% and the variance of returns is 0.5. In addition, the covariance of returns between any pair of assets is 0.15. Minimum-variance portfolio M has E[rm] = 0.10 and om = 70.1675 = 0.409. A risk-free asset exists which can be loaned at 5% and borrowed at 7%. (a) What is the standard deviation of returns for a portfolio with 20% invested in each of 4 assets, and 4% invested in each of another 5 assets? (b) What additional expected return could be obtained from switching from the portfolio in (a) to a "passive" portfolio with the same total risk? [Here, a "passive" portfolio is to be interpreted as a combination of the risk-free asset and the minimum-variance portfolio of risky assets)
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