Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit

FINM7008 Applied Investments

Workshop 4

(Practice question drawn from a prior examination)

Asset A has an expected return of 18%, Asset B has an expected return of 10%, and the rate of  return on T-bills is 7%. The covariance matrix for the two risky assets is as follows:

Asset         A          B

A           1600        90

B              90        400

Required:

a)   Calculate the expected return and standard deviation of a portfolio consisting of 20%  T-bills, 35% Asset A, and 45% Asset B.

b)  Suppose that you now wish to maximise your expected return, but do not want the portfolio standard deviation to exceed 16%.  What would be the proportions invested each in T-bills, Asset A, and Asset B?

c)  A colleague has provided the following table containing the expected returns and  standard deviations at various weightings of a two-asset risky portfolio  containing  Assets A and B:

(i)   Using calculations, identify which of the above six portfolios presents the  highest risk-adjusted performance.

(ii)  Draw a portfolio frontier spanning the two assets, and the capital allocation

line.  Ensure you appropriately label your axes, and identify the location of the minimum variance, and optimal risky portfolios.