Question

You have the following assets available to you to invest in:

Asset |
Expected Return |
Standard Deviation |

Risky debt |
6% |
0.25 |

Equity |
10% |
.60 |

Riskless debt |
4.5% |
0 |

The coefficient of correlation between the returns on the risky debt and equity is 0.72

*2D. Hector has a coefficient of risk aversion of 1.8. What
percentage of his assets should he invest in the risky
portfolio?*

*2E. What would the expected return be on Hector’s
portfolio?*

*2F. What would the standard deviation of Hector’s portfolio
be?*

Answer #1

Asset
Expected Return
Standard Deviation
Risky debt
6%
0.25
Equity
10%
.60
Riskless debt
4.5%
0
The coefficient of correlation between the returns on the risky
debt and equity is 0.72
2A. Using the Markowitz portfolio optimization method, what
would the composition of the optimal risky portfolio of these
assets be?
Please show work

Asset
Expected Return
Standard Deviation
Risky debt
6%
0.25
Equity
10%
.60
Riskless debt
4.5%
0
The coefficient of correlation between the returns on the risky
debt and equity is 0.72
2A. Using the Markowitz portfolio optimization method, what
would the composition of the optimal risky portfolio of these
assets be? 10 points
2B. What would the expected return be on this optimal
portfolio? 2 points
2C. What would the standard deviation of this optimal
portfolio be? 3 points

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and standard deviation of Asset B are 0.10 and 0.20, respectively,
and the correlation coefficient between the two is 0.25: (13
pts.)
What is the expected return of the new portfolio consisting of
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