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Answer the following questions: Q1. Mr. Miles decides to set aside a small part of his...

Answer the following questions:

Q1. Mr. Miles decides to set aside a small part of his wealth for investment in a portfolio that has greater risk than his previous investments because he anticipates that the overall market will generate attractive returns in the future. He assumes that he can borrow money at 5% and achieve the same return on the S&P 500 as before: an expected return of 15% with a standard deviation of 20%. Calculate his expected risk and return if he borrows 25%, 50%, and 100% of his initial investment amount.

Q2. Assume that you are given the following data on securities A and B. there are 3 potential portfolio including X, Y, and Z. calculate the return and standard deviation for the mentioned portfolios.

NOTE: This question was copied from the review questions.

Portfolio                   

Weight in security A

Weight in security B

Portfolio return

Portfolio SD

X

40

50

Y

40

10

Z

20

40

Return

15%

6%

SD

20%

8%

Corr. Between A&B

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Homework Answers

Answer #1

ans 1)

Return on Risk Free assset Portfolio return SD of Risk free SD of Portfolio
5% 15% 0 20%
Weight of Risk Free Weight of Portfolio Return SD
0 100% 15.00% 20.00%
-25% 125% 17.50% 25.00%
-50% 150% 20.00% 30.00%
-100% 200% 25.00% 40.00%

Ans 2)  

Portfolio                    Weight in security A Weight in security B Portfolio return Portfolio SD
X 40 50 10.00% 9.94%
Y 40 10 13.20% 16.08%
Z 20 40 9.00% 8.54%
Return 15% 6%
SD 20% 8%
Corr. Between A&B 0
0 0
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