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ASSIGNMENT #2
Total 45 marks
Problem #1 (8 marks)
Information on two assets, X & Y, is below. Portfolios A through K have been constructed by varying
the weights of Asset X and Asset Y, and the Expected Return and Standard Deviation is given for each.
a) Plot the portfolios on a graph (SD on x-axis & ER on y-axis) and label: (1 mark)
I. Minimum variance portfolio (MVP) (1 mark)
II.
Inefficient portfolios (1 mark)
III.
Efficient Portfolios. (1 mark)
b) As a risk averse investor (want to minimize risk), which portfolio(s) would you choose? Briefly
explain. (2 marks)
c) As an investor who is prepared to take on more risk (more tolerance for risk), which portfolio(s)
would you choose? Briefly explain. (2 marks)
a.
1
Winter 2021 Assignment #2
I.
II.
III.
Minimum variance Portfolio is Portfolio C.
The red points are inefficient portfolios.
The green points are efficient portfolios.
b. Risk averse investors will want a portfolio that has low volatility (risk), even if the expected return is
also low. So, the investor will choose minimum variance portfolio IE Portfolio C.
c. Investors who are prepared to take on more risk will go for those efficient portfolios which satisfy
their risk tolerance level. The portfolios from E to K, all offer good returns for the given level of risk.
The higher the investor moves on the efficiency fronti...