Fins2624(Portfolio Management)

Kai Lin(z3411977)

Question1
a).Total Market Volume: 58*1000+60*1200+140*500=$200000
Weighting for each stock:
A: 58*1000/200000=29%
B: 60*1200/200000=36%
C: 140*500/200000=35%
Hence, R M =0.29 R A +0.36 R B +0.35 RC
2M =Var ( 0.29 R A +0.36 R B +0.35 RC ) =0.292 2A +0.362 2B +0.352 2C +20.290.36Cov ( A , B )+ 20.29
Cov ( R A , R M )=Cov ( R A , 0.29 R A +0.36 R B+ 0.35 R C )
0.29 Var ( R A ) +0.36 Cov ( A , B ) +0.35 Cov ( A ,C )=0.290.1225+ 0.360.098+ 0.350.042=0.085505
Hence BetaA=0.085505/0.07500665=1.140
Cov ( R B , R M )=Cov ( RB , 0.29 R A +0.36 R B +0.35 RC )
0.29 Cov ( A , B ) +0.36 Var ( B )+ 0.35 Cov ( B , C )=0.290.098+0.360.16+0.350.04=0.10002
Hence BetaB=0.10002/0.07500665=1.333
Cov ( RC , RM ) =Cov ( RC , 0.29 R A +0.36 R B +0.35 RC )
0.29 Cov ( A ,C ) +0.36 Cov ( B ,C ) +0.35 Var (C )=0.04058
Hence BetaC=0.04058/0.07500665=0.541
Let the weight be w in A, 0.9-w in C0.1in rf
1.14w+(0.9-w)*0.541=0.6 w=18.89%
Rp=0.1Rf+0.1889RA+0.8111RC.
For beta P=0.9 zero risk free asset.
1.14w+(1-w)0.541=0.9
Rp=0.5993RA+0.4007RC

w=59.93%

1-w=40.07%

E ( RB )=r f + B ( E ( r M )r f ) =14.67 =4 +1.333 ( E ( r M ) 4 )

E ( r M )=12
E ( r A ) =r f + A ( E ( r M )r f ) =4 +1.14 ( 12 4 ) =13.12

Question2
A). r p=0.5r X +0.5 r Y
Var ( r P ) =Cov ( 0.5 r X +0.5 r Y , 0.5 r X + 0.5 r Y ) =0.25 Cov ( r X ,r X ) +0.25 Cov ( r Y , r Y ) + 0.5Cov ( r X , r Y )=0.25 (
N

B).

1
2
2 i
N i
N

C). As N->infinity

1
1
2 = 2i 0, unsystematic risks are diversified .
2 i
N
N i