a) First, ignore the fact that r₁f depends on whether you are long or short the risk-free asset. Suppose Trf = 2%. Solve for the tangency portfolio. b) Again, ignore the fact that rrf depends on whether you are long or short the risk-free asset. Suppose Trf = 9%. Solve for the tangency portfolio.

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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Suppose you are a hedge fund. You are trying to form a portfolio out of 2 risky assets
and a risk-free asset. You can take arbitrarily large long or short positions in the risky assets at no cost.
You can also take arbitrarily larger long or short positions in the risk-free asset; however, the risk-free rate
depends on whether you are lending or borrowing. You can invest positive amounts in the risk-free asset
and make 2% per year. However, if you short the risk-free asset (borrow money), you must pay 9% interest
each year on what you borrow. Formally, let wrf be your portfolio weight on the risk-free asset, and rrf be
the return on the risk-free asset. We have:
2% Wrf > 0
Prf
9% Wrf <0
Asset Expected Return
Standard Deviation
A
10%
12%
В
17%
22%
Assume the correlation between assets A and B is 0.4.
Transcribed Image Text:Suppose you are a hedge fund. You are trying to form a portfolio out of 2 risky assets and a risk-free asset. You can take arbitrarily large long or short positions in the risky assets at no cost. You can also take arbitrarily larger long or short positions in the risk-free asset; however, the risk-free rate depends on whether you are lending or borrowing. You can invest positive amounts in the risk-free asset and make 2% per year. However, if you short the risk-free asset (borrow money), you must pay 9% interest each year on what you borrow. Formally, let wrf be your portfolio weight on the risk-free asset, and rrf be the return on the risk-free asset. We have: 2% Wrf > 0 Prf 9% Wrf <0 Asset Expected Return Standard Deviation A 10% 12% В 17% 22% Assume the correlation between assets A and B is 0.4.
a)
Suppose rrf = 2%. Solve for the tangency portfolio.
First, ignore the fact that rrf depends on whether you are long or short the risk-free asset.
b)
asset. Suppose rrf =
Again, ignore the fact that rrf depends on whether you are long or short the risk-free
9%. Solve for the tangency portfolio.
Transcribed Image Text:a) Suppose rrf = 2%. Solve for the tangency portfolio. First, ignore the fact that rrf depends on whether you are long or short the risk-free asset. b) asset. Suppose rrf = Again, ignore the fact that rrf depends on whether you are long or short the risk-free 9%. Solve for the tangency portfolio.
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