When both borrowing and lending at the risk-free rate are allowed, there is a unique fund F of risky assets that is efficient. All points on the efficient frontier are combinations of F and the risk-free asset. The information concerning the 1-year covaria es of the
When both borrowing and lending at the risk-free rate are allowed, there is a unique fund F of risky assets that is efficient. All points on the efficient frontier are combinations of F and the risk-free asset. The information concerning the 1-year covaria es of the
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter3: Risk And Return: Part Ii
Section: Chapter Questions
Problem 4P
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Transcribed Image Text:FIGURE 6.14 One-fund theorem.
When both borrowing and lending at
the risk-free rate are allowed, there is
a unique fund F of risky assets that
is efficient. All points on the efficient
frontier are combinations of F and
the risk-free asset.
The information concerning the 1-year covariances and mean values of the
rates of return on five risky securities (assets) is shown in the table below.
Security
Covariance V
2.30
93
.62
74
15.1
-23
26
-27
-56
2
56
12.5
93
62
1.40
22
22
56
1.80
.78
-27
78
3.40
-56
14.7
9.02
17.68
4
74
- 23
26
2.60
The mean values in the column labeled F are expressed on a percentage basis,
whereas the covariances are expressed in units of (percent)? / 100. For
example, the first security has an expected rate of return of 15.1%, or 0.151,
and a variance of return of 0.023. And the covariance between security 1 and
security 2 is 0.0093, while the covariance between security 1 and security 3 is
0.0062.
Assume there is also a risk-free asset with r; = 10%.
The one-fund theorem states that there is a single fund F of risky assets such
that any efficient portfolio can be constructed as a combination of the fund
Fand the risk-free asset.
What is the weight w4of security 4 corresponding to the single fund F?
Please round your numerical answer to two decimal places.
What is the portfolio variance of the single fund F
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