Tutorial 4

Question 1

Tuto 5(d)

Shortfall probability of 1%–> how to calculate?

Answer 1

Use Normal Distribution Table.

Phi inverse (1%)= xxx

Ratio of expectedreturn p to sigma p = - xxx

Replace in efficient frontier equation

Question 2

Riskless asset –>

Value of a, b, c, d etc… are independent of riskless/risky asset situation

Answer 2

efficient frontier is a straight line

Question 2

T7 CAPM
Proportion of stocks in portfolio–>

Expected return of market portfolio:

Std deviation of mkt portfolio:

Beta of stock A:

Answer 2

Stocks* P(stocks) / Summation #Stocks* P(stocks)

Proportion of stock A in portfolio * Expected return + Proportion of stock B in portfolio * Expected return

(proportion A * std dev A)^2 + (proportion B * std dev B)^2 + 2* std dev A * std dev B * correlation coeff A,B

ß = cov(ri, rm) / variance rm
cov(ri, rm) = proportion A * variance A + proportion of B * (std dev A * std dev B * correlation coeff A,B)

Question 3

All risk efficient portfolios lie …

Answer 3

on the CML

Question 4

If r12 =1, then no diversification.
If returns are not perfectly positively correlated (i.e. r 1 1), then diversification reduces risk. The lower the correlation, the greater the reduction in risk.

Answer 4

tutorial 3.4