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problem 1)

You are given the following information on two risky assets X and Y.

E(X) = 15% and E(Y) = 30%

Var (X) = 16% and Var(Y) = 25%. rxy = 0.5.

Weight in X (%)         100   75   50   25     0
Weight in Y (%)           0     25   50   75   100

(i) Compute the mean and standard deviation of the portfolios with weights as shown in the table above.

(ii) What is the minimum variance portfolio risk and return?

(ii) Draw the opportunity set.

(iii) If you introduce risk free asset in your portfolio of risky assets; how will this change the shape of opportunity? What are the main implications with respect to portfolio theory?

(iv) In (iii) above; how the opportunity set will be affected if the risk free borrowing and lending rates are not equal?

(v) Define and Compare Security Market Line and Capital Market Line.

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  • Category:- Accounting Basics
  • Reference No.:- M96399

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