9. Consider the case of two financial assets and three market conditions (states). The table below gives the respective probability for each market condition and the return of each asset in each one of them. Market Conditions State Recession Normality Expansion Probability of state 10% 60% 30% Return of asset A -20% 20% 70% Return of asset B -10% 10% 35% a. Derive the expected returns and the standard deviation of returns for the two assets above. b. Consider the portfolio with 50% investment in each of the two assets above. Calculate the expected return and the standard deviation of the portfolio. c. Estimate the equation of the efficiency frontier.
9. Consider the case of two financial assets and three market conditions (states). The table below gives the respective probability for each market condition and the return of each asset in each one of them. Market Conditions State Recession Normality Expansion Probability of state 10% 60% 30% Return of asset A -20% 20% 70% Return of asset B -10% 10% 35% a. Derive the expected returns and the standard deviation of returns for the two assets above. b. Consider the portfolio with 50% investment in each of the two assets above. Calculate the expected return and the standard deviation of the portfolio. c. Estimate the equation of the efficiency frontier.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:9. Consider the case of two financial assets and three market conditions (states). The table
below gives the respective probability for each market condition and the return of each asset
in each one of them.
Market Conditions
State
Recession
Normality
Expansion
Probability of state
10%
60%
30%
Return of asset A
-20%
20%
70%
Return of asset B
-10%
10%
35%
a. Derive the expected returns and the standard deviation of returns for the two assets
above.
b. Consider the portfolio with 50% investment in each of the two assets above. Calculate
the expected return and the standard deviation of the portfolio.
c. Estimate the equation of the efficiency frontier.
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