Question

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

Answer #1

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**Answer:**

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

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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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
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rp=................%
op=................%

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