HomeworkLib
Question

Consider two assets A and B. Each has the same expected return. Suppose that the variance...

Consider two assets A and B. Each has the same expected return. Suppose that the variance of the return on A is 49 and the variance of the return on asset B is 100. The returns on the two assets are correlated with a correlation coefficient of .4. If an investor wants to hold a portfolio of the two assets that has the smallest variance of its return, what fraction of the investor’s wealth should be in asset A? How would this fraction change, i.e. get smaller or larger, if the correlation coefficient got smaller?

business   economics   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Fraction of investor's wealth in asset A = 0.77 = 77%

Fraction of investor's wealth in asset B = 0.23 = 23%

Explanation has been given in the following image

0 0
Add a comment
Know the answer?
Add Answer to:
Consider two assets A and B. Each has the same expected return. Suppose that the variance...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Suppose there are three assets: A, B, and C. Asset A’s expected return and standard deviation are 1 percent and 1 percent. Asset B has the same expected return and standard deviation as Asset A. However, the correlation coefficient of Assets A and B is −0

    Suppose there are three assets: A, B, and C. Asset A’s expected return and standard deviation are 1 percent and 1 percent. Asset B has the same expected return and standard deviation as Asset A. However, the correlation coefficient of Assets A and B is −0.25. Asset C’s return is independent of the other two assets. The expected return and standard deviation of Asset C are 0.5 percent and 1 percent. (a) Find a portfolio of the three assets that...

  • Consider the following two assets. Returns on asset 1 has a mean of ui and standard...

    Consider the following two assets. Returns on asset 1 has a mean of ui and standard deviation of 01. Returns on asset 2 has a mean of j2 and standard deviation of 02. The correlation coefficient p1,2 measures how the two assets' returns are correlated, and it takes on values between -1 and +1. An investor puts W1 fraction of her wealth into stock 1, and W2 =1-W1 fraction of her wealth into stock 2. 1. Using the equation on...

  • Consider the following two assets. Returns on asset l has a mean of μ i and...

    Consider the following two assets. Returns on asset l has a mean of μ i and standard deviation of . Returns on asset 2 has a mean of μ2 and standard deviation of σ2. The correlation coefficient 2 measures how the two assets' returns are correlated, and it takes on values between-1 and +1. An investor puts Wi fraction of her wealth into stock 1, and W2 = 1-WI fraction of her wealth into stock 2. 1. Using the equation...

  • Question 1: Suppose there are two risky assets, A and B. You collect the following data...

    Question 1: Suppose there are two risky assets, A and B. You collect the following data on probabilities of different states happening and the returns of the two risky assets in different states: State Probability Return Asset A Return Asset B State 10.3 7% 14% State 20.4 6% -4% State 30.3 -8% 8% The risk-free rate of return is 2%. (a) Calculate expected returns, variances, standard deviations, covariance, and correlation of returns of the two risky assets. (b) There are...

  • Asset 1 has 6% expected return and 5% standard deviation.Asset 2 has 12% expected return and...

    Asset 1 has 6% expected return and 5% standard deviation.Asset 2 has 12% expected return and 10% standard deviation A. If the correlation coefficient is less than one, then no portfolio obtained by combining assets 1 and 2 can have an expected return larger than 6%. B. If the correlation coefficient is equal to one, then no portfolio obtained by combining assets 1 and 2 can have a standard deviation lower than 5%. C. If the correlation coefficient is less...

  • Suppose that you are told that the minimum variance portfolio has an expected return of 5%...

    Suppose that you are told that the minimum variance portfolio has an expected return of 5% and a variance of 16. All investors have portfolios that are on the efficient frontier. If investors don’t have access to a risk-free asset, what can you conclude about the returns and variance of any investor’s portfolio? The expected return and variance are greater than or equal to 5% and 16 respectively. The expected return and variance are less than or equal to 5%...

  • Assume you wish to evaluate the risk and return behaviors associated with various combinations of assets...

    Assume you wish to evaluate the risk and return behaviors associated with various combinations of assets V and W under three assumed degrees of​ correlation: perfect​ positive, uncorrelated, and perfect negative. The following average return and risk values were calculated for these​ assets: Asset    Average​ Return, r Risk​ (Standard Deviation), s V 7.9​% 4.6​% W 12.7​% 9.7​% a. If the returns of assets V and W are perfectly positively correlated​ (correlation coefficient = + 1​), describe the range of​...

  • you are considering investing in two securities. Security 1 has a expected return of 12% and...

    you are considering investing in two securities. Security 1 has a expected return of 12% and a standard deviation of return of 10%. Security 2 has an expected return of 9%and a standard deviation of returns of 8%. The correlation coefficient of returns for the two securities is 0.3. What would the weights be for each of the two securities in the minimum variance portfolio? W1= W2= Given the weights computed in (a), compute the expected return and standard deviation...

  • Assume an investment manager is considering to invest in a portfolio composed of Stock (A) and Stock (B). Stock (A) has an expected return of 10% and a Variance of 100 (Standard Deviation=10), while Stock (B) has an expected return of

    Assume an investment manager is considering to invest in a portfolio composed of Stock (A) and Stock (B).                     Stock (A) has an expected return of 10% and a Variance of 100 (Standard Deviation=10), while Stock (B) has an expected return of 20% and a Variance of 900 (Standard deviation=30).1-      Calculate the expected return and variance of the portfolio if the proportion invested in Sock (A) is (0, .2, .3,.5. .6,.7,1) .The Correlation Coefficient is .4.2-      If the Correlation Coefficient is...

  • There are only two risky assets (stocks) A and B in the market. Asset A: Mean...

    There are only two risky assets (stocks) A and B in the market. Asset A: Mean = 20% Standard Deviation = 10% Asset B: Mean = 10% Standard Deviation = 5% Returns on Assets have zero correlation. A.Assume that there is no risk-free asset. (i)Plot (sketch) the efficiency frontier (the investment opportunity set). (ii)What is the expected return and the standard deviation of the minimum-variance-portfolio? (iii)An investor would like to construct a portfolio that has a standard deviation of 8%....

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT