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The End is Near! Questions Related to Portfolios Construction and CAPM Economics 466 and 466W - Due on Thursday December 7 (start of class) What

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The End is Near! Questions Related to Portfolios Construction and CAPM Economics 466 and 466W - Due on Thursday December 7 (start of class) What is the portfolio risk of holding 11 positions with identical volatility (any arbitrary volatility) with one position being 50% of the portfolio and the remaining 10 being 5% each? Assume positions are uncorrelated. I. There are two approaches to this problem. The direct approach works with all 11 positions at once. The indirect approach considers a portfolio of portfolios. The following questions assume there are three risky asset classes in the economy. Market Capitalization Volatil 20 15 9 ($ trillion)Beta Asset Small Cap Equity Large Cap Equity Corporate & Govt Bonds 8 12 20 1.9 1.4 0.4 2. What are the weights and beta of the market portfolio? What is the expected return of Large Cap Equity if the market portfolio has an expected return of 10% and the risk free rate is 1%? 3. The following is the correlation matrix for the three risky assets. Small Cap Large CapCorporate Equity 0.6 Govt Bonds 0.2 Small Cap Equity 0.4 Large Cap Equity 0.6 0.4 Corporate & Govt Bonds0.2 What is the expected return and volatility of the portfolio that is 60% Large Cap Equity and 40% Corporate and Govt Bonds? 4

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