Question

Asset Expected Return Standard Deviation Risky debt 6% 0.25 Equity 10% .60 Riskless debt 4.5% 0...

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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Homework Answers

Answer #1

2A) Weights of equity and risky debt in the optimal portfolio can be calculated as follows:

So therefore, we need to be allowe dto do short selling to create the optimal portfolio

2B) Portfolio Expected return is calcualted by solving the following equation:


2C) Portfolio standard deviation is calculated by solving the following equation:


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