Problem Set 7 helpful hints

  1. The least risky combination of Security A and Security B in Problem 1 is found by calculating {w_A} = \displaystyle\frac{{\sigma _B^2 - {\sigma _{AB}}}}{{\sigma _A^2 + \sigma _B^2 - 2{\sigma _{AB}}}} and {w_B} = 1 - {w_A}.
  2. It will always be the case for 2 security portfolios that by following the minimum variance portfolio weighting scheme in the previous bullet point, such a portfolio must have zero variance if {\rho _{AB}} = 1 or -1.
  3. In part B of Problem 2, the Sharpe Ratio for security j is \displaystyle\frac{{E({r_j}) - {r_f}}}{{{\sigma _j}}}.
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