Question 5 Please.

Part IV. Construction of Feasible Investment Opportunity Set and the Efficient Frontier 1. Consider two securities for a potential portfolio inclusion: E(r1)=25%, E(r2)=10%,0,=75%,02=25%, P12 Draw all feasible investment combinations given these two risky assets in a plane of {Op, E(rp)} in Excel for five cases: (1) P12 =1, (2)P 12 = 0.2, (3) P12 = -0.2, (4) P12 = -1. What does the feasible set look like? How about the efficient frontier? 2. Consider three securities for a potential portfolio inclusion: Expected Returns Asset A Asset B Asset C 0.05 0.1 0.15 Asset A Asset B Asset C Return Covariance Matrix Asset A Asset B Asset C 0.04 0.02 0 0.02 0.1 0.06 0 0.06 0.16 Draw all feasible investment combinations given these three risky assets in a plane of {Op, E(rp)} in Excel for two cases: (1) Short-selling is allowed, (2) Short selling is prohibited. What does the feasible set look like? How about the efficient frontier? 3. Construct a portfolio which has the expected return of 14% and resides on the efficient frontier generated from Q2 in Part IV in these two cases. How do you construct such a portfolio and what is its return variance? 4. Given a risk-free rate of 3%, how do you construct the optimal risky portfolio, the tangency portfolio between the efficient frontier generated from Q2 in Part IV and the capital allocation line extending from the risk-free rate? 5. (Continue in Q2) Suppose Company B becomes a rival to Company C in the market due to M&A and thus the covariance changes from +0.06 to -0.06. How does it change the outlook of the feasible investment opportunity set? How will this change affect your solution for Q4? Part IV. Construction of Feasible Investment Opportunity Set and the Efficient Frontier 1. Consider two securities for a potential portfolio inclusion: E(r1)=25%, E(r2)=10%,0,=75%,02=25%, P12 Draw all feasible investment combinations given these two risky assets in a plane of {Op, E(rp)} in Excel for five cases: (1) P12 =1, (2)P 12 = 0.2, (3) P12 = -0.2, (4) P12 = -1. What does the feasible set look like? How about the efficient frontier? 2. Consider three securities for a potential portfolio inclusion: Expected Returns Asset A Asset B Asset C 0.05 0.1 0.15 Asset A Asset B Asset C Return Covariance Matrix Asset A Asset B Asset C 0.04 0.02 0 0.02 0.1 0.06 0 0.06 0.16 Draw all feasible investment combinations given these three risky assets in a plane of {Op, E(rp)} in Excel for two cases: (1) Short-selling is allowed, (2) Short selling is prohibited. What does the feasible set look like? How about the efficient frontier? 3. Construct a portfolio which has the expected return of 14% and resides on the efficient frontier generated from Q2 in Part IV in these two cases. How do you construct such a portfolio and what is its return variance? 4. Given a risk-free rate of 3%, how do you construct the optimal risky portfolio, the tangency portfolio between the efficient frontier generated from Q2 in Part IV and the capital allocation line extending from the risk-free rate? 5. (Continue in Q2) Suppose Company B becomes a rival to Company C in the market due to M&A and thus the covariance changes from +0.06 to -0.06. How does it change the outlook of the feasible investment opportunity set? How will this change affect your solution for Q4