Question

The expected return of NW is 15% with a 10% standard deviation of return. The expected...

The expected return of NW is 15% with a 10% standard deviation of return. The expected return of SE is 8% with a 20% standard deviation of return. Draw the opportunity sets given below by hand on a sheet of paper, overlaying both opportunity sets on the same axes. The y-axis is expected return, and the x-axis is standard deviation.

Upload a picture of your drawing. You do not need to be precise with your drawings; just be sure to get the shapes correct.

Set 1: Correlation between NW and SE is 1.0. Weights in NW vary from 0.50 to 1.50.

Set 2: Correlation between NW and SE is 0.3. Weights in SE vary from 0 to 1.50.

Homework Answers

Answer #1

CAse 1

When Correlation between NW and SE is 1.0

As we Know that the expected Return of two securities portfolio is = ERP= ERx*Weightx + ERy*Weighty

And Standard Deviation of two securities portfolio =SDx2* weightx+ SDy2 * weighty + 2*SDx*SDy*Weightx*Weighty* Correlationxy

Hence ERxy SDxy having different weights of NW from 0.5 to 1.5

If Weight of NW 0.5 1.0 1.5
SE = 1- Weight of NW 0.5 0.0 -0.5
ER

15*0.5+8*0.5

= 11.5

15 18.5
SD

102*0.5+202*0.5+2*10*20*0.5*0.5*1

=18.71

10 -14.14
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