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Section 7.

4 OLC Model

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Chapter 7 Two-Security Portfolio

Asset Allocation Analysis: Risk and Return


Expected
Standard
Return
Deviation
Security 1
0.08
0.12
Security 2
0.13
0.2
T-Bill
0.05
0

Weight
Security 1
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0

Weight
Security 2
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1

Minimum Variance Portfolio


Weight 1
Weight 2
Return
Risk
CAL(MV)
Optimal Risky Portfolio
Weight 1
Weight 2
Ex Ret
St Dev.
CAL(OR)
Reward to
Variability

Corr.
Coeff s,b Covariance
0.3
0.0072

Expected
Standard Reward to
Return
Deviation Variability
0.08000
0.12000 0.25000
0.08500
0.11559 0.30281
0.09000
0.11454 0.34922
0.09500
0.11696 0.38474
0.10000
0.12264 0.40771
0.10500
0.13115 0.41937
0.11000
0.14199 0.42258
0.11500
0.15466 0.42027
0.12000
0.16876 0.41479
0.12500
0.18396 0.40771
0.13000
0.20000 0.40000
Short Sales No Short
Allowed
Sales
0.82000
0.82000
0.18000
0.18000
0.08900
0.08900
0.11447
0.11447

Short Sales No Short


Allowed
Sales
0.40000
0.40000
0.60000
0.60000
0.11000
0.11000
0.14199
0.14199

0.42258

0.42258

Optimal Portfolio with a Risk Free Asset


Short Sales No Short
Allowed
Sales
Desired rate of return:
0.12
Weight OP
Weight RF
Ex Ret
St Dev

1.16667
-0.16667
0.12000
0.16565

Optimal Portfolio w/o a Risk Free Asset


Desired rate of return:

0.12

Weight 1
Weight 2
Ex. Return
St Dev

0.20000
0.80000
0.12000
0.16876

1.16667
-0.16667
0.12000
0.16565

Solution to OLC Ques 1-4

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Chapter 7 Two-Security Portfolio

Asset Allocation Analysis: Risk and Return


Expected
Standard
Corr.
Return
Deviation
Coeff 1,2 Covariance
Security 1
0.09
0.18
0.3
0.01512
Security 2
0.17
0.28
T-Bill
0.035
0

Weight
Weight
Security 1 Security 2
1
0
0.9
0.1
0.8
0.2
0.7
0.3
0.6
0.4
0.5
0.5
0.4
0.6
0.3
0.7
0.2
0.8
0.1
0.9
0
1

Expected
Standard Reward to
Return
Deviation Variability
0.09000
0.18000 0.30556
0.09800
0.17248 0.36526
0.10600
0.16944 0.41902
0.11400
0.17112 0.46166
0.12200
0.17739 0.49046
0.13000
0.18778 0.50592
0.13800
0.20166 0.51077
0.14600
0.21836 0.50833
0.15400
0.23730 0.50148
0.16200
0.25797 0.49230
0.17000
0.28000 0.48214

Minimum Variance Port Short Sales No Short


Allowed
Sales
Weight 1
0.78550
0.78550
Weight 2
0.21450
0.21450
Return
0.10716
0.10716
Risk
0.16939
0.16939
CAL(MV)
Optimal Risky Portfoli Short Sales No Short
Allowed
Sales
Weight 1
0.39063
0.39063
Weight 2
0.60937
0.60937
Ex Ret
0.13875
0.13875
St Dev.
0.20311
0.20311
CAL(OR)
Reward to
Variability

0.51080

0.51080

Optimal Portfolio with a Risk Free Asset


Short Sales No Short
Allowed
Sales
Desired rate of return:
0.12
Weight OP
Weight RF
Ex Ret
St Dev

0.81928
0.18072
0.12000
0.16641

Optimal Portfolio w/o a Risk Free Asset


Desired rate of return:

0.12

Weight 1
Weight 2
Ex. Return
St Dev

0.62500
0.37500
0.12000
0.17541

0.81928
0.18072
0.12000
0.16641