Question
You can invest in two different securities. Security A has a mean return of 5% and a volatility of 8%,whereas security B has a mean
You can invest in two different securities. Security A has a mean return of 5% and a volatility of 8%,whereas security B has a mean return of 7% and a volatility of 13%. The correlation between the twosecurities is -0.21 a) Determine the global minimum variance portfolio (MVP). Short-selling is not allowed and all themoney has to be invested. (10 Marks) b) Determine the expected return and variance of the MVP. Compare your findings to the moments ofthe two individual securities. Interpret the results. (10 Marks) c) Let's introduce a risk-free asset (r) that provides 4% return. How does the risk-free asset affect theMVP? (5 Marks) d) Determine the efficient portfolio if the investor wants an expected portfolio return of 6.5%. (10 Marks) e) Can you generalise your finding in d) by choosing a parameter R for the expected portfolio returninstead of the fixed value of 6.5%? How can you interpret the finding? (8 Marks) f) Determine the excess return (R - risk-free rate) at which the investor does not invest any money (orborrow any money) at the risk-free rate. How can you interpret this portfolio?
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