The correlation between the fund returns is 0.15. 6. Tabulate and draw the investment opportunity set of the two risky funds.
Use investment proportions for the stock fund of 0 to 100% in increments of 20%. What expected return and standard deviation does your graph show for the minimum variance portfolio?
7. Draw a tangent from the risk-free rate to the opportunity set. What does your graph show for the expected return and standard deviation of the optimal risky portfolio?
8. What is the reward-to-variability ratio of the best feasible CAL?
9. Suppose now that your portfolio must yield an expected return of 12% and be efficient, that is, on the best feasible CAL.
a. What is the standard deviation of your portfolio?
b. What is the proportion invested in the T-bill fund and each of the two risky funds?
10. If you were to use only the two risky funds and still require an expected return of 12%, what would be the investment proportions of your portfolio? Compare its standard deviation to that of the optimal portfolio in the previous problem. What do you conclude?
11. Stocks offer an expected rate of return of 10% with a standard deviation of 20% and gold offers an expected return of 5% with a standard deviation of 25%.
a. In light of the apparent inferiority of gold to stocks with respect to both mean return and volatility, would anyone hold gold? If so, demonstrate graphically why one would do so.
b. How would you answer (a) if the correlation coefficient between gold and stocks were 1.0? Draw a graph illustrating why one would or would not hold gold. Could these expected returns, standard deviations, and correlation represent an equilibrium for the security market?
12. Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rf. The characteristics of two of the stocks are as follows:
Stock
Expected Return Standard Deviation
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If you're like a lot of people watching the recession unfold, you have likely started to look at your finances under a microscope. Perhaps you have started saving the annual savings rate by people has started to recover a bit.