sa ficient frontier — the multi-ass 4.8 Problems Question 4.1 Give an example ofa symmetric matrix that contains no 25708 and isnot invertible. Question 42. Two.ssets have mean returns 11 and 12, standard 0. Find the tangent portfolio and minimal variance “free asset) ifthe risk-free rate is 1. Find also the Question 43. Two assets have mean returns 11 Find the tangent port fee asset) if the risk-free rate is. Fi Question 44 Suppose assets 4, B, C have expected returns 11, 14 and 17 C, What are its expected return and varian the composition of the tangent portfolio, and com standard deviation, ts expected return and Question 48 Suppose asets A, B, C have expected retms 12, 16 and & Suppose their covariance matrix of returns is 21 0 ” 131 01 2, Find the composition ofthe minimum variance portfolio involving 4, B and C- ‘What is its expected return and variance? Question 46 Let ebea vector of Is. Show retums, Ry isthe risk-free rate x =R— Rye, retums andy = C~'x, then the tangent portfolio, v, has variance Ris te vector of expected is the covariance matrix of Question 4.7 What is the as x goes to infinity of we Bt Sects 4.8 Problems 35 Question 4:8 Suppose risky assets 16, There exists a risk-free a: variance investors. Investor 4 holds the fractions 15, of his portfolio in each of the risky 0.25 of the first asset. How much does she hold of each ofthe other assets Question 4.9 An investor can invest in any of 250 stocks. He ean ploce money on deposit ata rate of 3% and cannot borrow. Ife is @ nestor, deseribe the geometry ofthe set of investments he would consider in: th returms Ryy.+. Re sn-variance efficient. est in Xr. Will the ‘A portal with weighs 01,0, ‘Te waiance of Ry isnot 0, A second investor cannot portfolio with weightings 66/28 ‘be mean-variance efficient for this investor, in general? Justify your answer, Question 4.11 An investor can inves in n assets, with returns Ry th weights 8, 83,...,0nyis known to be mean-variance eff ‘of Ra is zero. A second investor cannot invest in Xq- Wil portfolio with weightings % re be effic for this investor, in general? Justify your answer. Question 4.12 Investments 4, B, Cand D have covariance matrix of returns 433 0 3430 3330 0000 and have expected rates of retum 6, 5, 4, and 2 respectively. Find the eomposi- tion and standard deviation of an efficient portfolio with expected rate of return 6.5. 3 3 05. How ean we improve the stability of « and B est factor model? 6. How could you as varianco matrix? 7. If we linearly regress the betas in one period against a previous period, what properties would we expect ofthe coefficients found? 8. Deseribe Blume’s technique and discuss briefly why itis plausible, 9. What isthe advantage of us ia single-factor model \damental analysis fo est 5.11 Problems Suppose a single-factor model is an accurate model of security the model every stock has the same residval risk term with ‘What standard deviation of residual risk would you 0, 20 and 50 equally weighted stocks? Question returns, and t standard dev expect in port igle-factor model is an accurate model of security i that in the mode! every stock has the average standard deviation of residual risk is 20. How many stocks would be needed to reduce the standard Aoviation of residual risk to 10, 1, and 0.1? Question 5.3 We model 3 stocks using a single-factor model, they have betas, of 3, 2, and 0.5, and their alphas are 1, 2, and 3. Their residual risks have variances 10, 20, and 30. The market has expected return 10 and variance 20. (Compute the stocks’ expected returns and covariance matrix of returns. Question 5.4 Suppose investments R have the distribyion , ByRn + fis ‘where Ry is the etm on the market, and the terms f, have the properties Elfifi) = 8 fori 4 j, and B(f,) = 0, and E(/?) =e. They are also independent of R,. Find expres- 1 the expected return of asset i, «the variance of asset i, and asset S11 Problems 3 Question 5.5 The risk-free rate is 3. The market has expes variance of returns 4. Three assets are modelled by and 2; and variance of resi for a mean-variance investor, What are or a mean-variance investor who wishes a variance return and standard deviation of returns? Question $7 Suppose the market has expe ation 5. Two stocks return 10, and standard de- 20, standard deviations 8 With the market are 0.1 and 0.2. Assuming a single-factor model, find their alphas and betas. Question 5.8. A regression of betas in the last period, B, yields the equation Br = 0.88; +0.23, urrent period, >, against betas in the betas of two stocks in the current period are 0.8 and 1.2, use Blume’s technique to predict their betas in the next period, Question 5.9 A regression of betas in the current period, B2, against betas in the last period, By, yields the equation Bo = 0.98, + 0.13. Ifthe betas of three stocks in the current period are 0.8, 1, and 1.2 use Blume's ‘technique to predict their betas in the next period, Question 5.10 A regression of betas in the current period, B2, against betas in the last period, Bi, yields the equation Pr = Api +8. ‘A manager gives the same data to each of three ute A and B. The three interns get the following differing results 1. 4=0.634,8=0.350, 2 Aw 12 B= 02, 3. 4=07,8