Suppose assets x and y have the following state dependent returns:
State | Probability | Asset x | Asset y |
A | 0.15 | 18% | 8% |
B | 0.15 | -5% | -3% |
C | 0.1 | 8% | 10% |
D | 0.2 | 10% | 6% |
E | 0.25 | 15% | -5% |
F | 0.15 | -20% | 2% |
% in x 125 100 75 50 25 0 -25
% in y -25 0 25 50 75 100 125
Plot the portfolio profiles in the space of mean and standard deviation.
and y?
Probability | Portfolio | Market |
0.1 | -0.15 | -0.30 |
0.3 | 0.05 | 0.00 |
0.4 | 0.15 | 0.20 |
0.2 | 0.20 | 0.25 |
The risk-free rate is 6%
R˜ − r_{f} = α + β(R˜m − r_{f} ) + .
Suppose you have obtained the following information:
Stock | α | β | |
A | 0.0087 | 0.1618 | 0.1050 |
B | 0.0173 | 1.0524 | 0.2667 |
C | 0.0017 | 0.6189 | 0.1637 |
D | 0.0055 | 1.0446 | 0.0929 |
E | 0.0016 | 1.1048 | 0.1645 |
F | 0.0072 | 0.7845 | 0.0840 |
M | 0.0000 | 1.0000 | 0.0000 |
The expected return on the index portfolio is 9% with a standard deviation of 7.5%. The risk free rate is 3%.
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