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The following questions are related to modern portfolio theory. Assume there are only two stocks in the equity market. The risk-free rate is 1.00%. Stock
The following questions are related to modern portfolio theory.
Assume there are only two stocks in the equity market.
The risk-free rate is 1.00%.
Stock | Return | Volatility | Correlation Matrix X | Correlation Matrix Y |
X | 15% | 20% | 1.0 | 0.7 |
Y | 10% | 15% | 0.7 | 1.0 |
(a) Make an investment portfolio using the risky assets that has an expected return 12%. [5]
(b) Calculate the volatility of the portfolio in (a). [5]
(c) Calculate the composition of the market portfolio. [10]
(d) Construct, using the risk-free asset, the minimum variance portfolio that has an expected return 12%.
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