3. Asset 1 has an expected return of 10% with a standard deviation of 25%, and asset 2 has an expected return of 15% and a standard deviation of 35%. The covariance between the returns is 0.0175 and the risk-free rate is 8%. (a) What is the optimal portfolio consisting of risky assets and risk-free asset if you want an average return of 0.10? Answer. (b) Can you find a portfolio consisting of risky and risk-free assets with average return of 0.10 and variance of return 0.009? Why or why not? Answer.
3. Asset 1 has an expected return of 10% with a standard deviation of 25%, and asset 2 has an expected return of 15% and a standard deviation of 35%. The covariance between the returns is 0.0175 and the risk-free rate is 8%. (a) What is the optimal portfolio consisting of risky assets and risk-free asset if you want an average return of 0.10? Answer. (b) Can you find a portfolio consisting of risky and risk-free assets with average return of 0.10 and variance of return 0.009? Why or why not? Answer.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:3. Asset 1 has an expected return of 10% with a standard deviation of 25%, and asset 2 has an
expected return of 15% and a standard deviation of 35%. The covariance between the returns
is 0.0175 and the risk-free rate is 8%.
(a) What is the optimal portfolio consisting of risky assets and risk-free asset if you want
an average return of 0.10? Answer.
(b) Can you find a portfolio consisting of risky and risk-free assets with average return of
0.10 and variance of return 0.009? Why or why not? Answer.
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