State of the Economy Probability HPR (Fund A) HPR (Fund B) Boom .50 7% 25% Normal growth .3 -5% 10% Recession .2 20% -25% 1. What are the expected holding period...

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Finance

State of the Economy
Probability
HPR (Fund A)
HPR (Fund B)
Boom
.50
7%
25%
Normal growth
.3
-5%
10%
Recession
.2
20%
-25%
1. What are the expected holding period returns forFund A and Fund B?
2. What are the expected standard deviations for Fund A and FundB?
3. What are the covariance and correlation coefficient betweenthe returns of Fund A and Fund B?
4. Now using Fund A and Fund B to construct our optimal riskportfolio P, what are the weights for Fund A and Fund B if riskfree rate is 4.25% ?
5. What are the expected return and Standard Deviation of theoptimal risky portfolio P?
6. What is the Sharpe Ratio (Reward-to-Variability) of the CALline that joins the risk-free asset and optimal risky asset P?
7. If your risk aversion index A = 4, what is your optimalallocation between risky asset P (y) and risk-free asset (1-y)?
8. What are expected rate of return and standard deviation ofyour complete portfolio that is constructed with risky asset P andrisk-free asset?

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3.9 Ratings (607 Votes)

Expected Return SUM of ProbabilityReturnVariance SUM of Probability Deviation SquaredDeviation Return Expected ReturnFUND APR1APR1B1R16C1B12D1C1PState of See Answer

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State of the EconomyProbabilityHPR (Fund A)HPR (Fund B)Boom.507%25%Normal growth.3-5%10%Recession.220%-25%1. What are the expected holding period returns forFund A and Fund B?2. What are the expected standard deviations for Fund A and FundB?3. What are the covariance and correlation coefficient betweenthe returns of Fund A and Fund B?4. Now using Fund A and Fund B to construct our optimal riskportfolio P, what are the weights for Fund A and Fund B if riskfree rate is 4.25% ? 5. What are the expected return and Standard Deviation of theoptimal risky portfolio P?6. What is the Sharpe Ratio (Reward-to-Variability) of the CALline that joins the risk-free asset and optimal risky asset P?7. If your risk aversion index A = 4, what is your optimalallocation between risky asset P (y) and risk-free asset (1-y)?8. What are expected rate of return and standard deviation ofyour complete portfolio that is constructed with risky asset P andrisk-free asset?

State of the Economy	Probability	HPR (Fund A)	HPR (Fund B)
Boom	.50	7%	25%
Normal growth	.3	-5%	10%
Recession	.2	20%	-25%