Your investment horizon is one year. You observe that the government is offering a completely safe one-year Treasury instrument with a 5 percent return. You also assume that the historical returns above give you the best available information about future expected returns, variances and covariances for the alternative asset classes. You are restricted from selling short. Using the spreadsheet approach described in the book, find the efficient frontier of risky asset portfolios. Also find the optimal portfolio to combine with the safe asset. What weights does the optimal portfolio have on large stocks, small stocks, and corporate bonds? What is the expected return and standard deviation of this optimal risky portfolio? My suggestion is to calculate risk minimizing portfolios for expected returns of 12.0, 12.5, 13.0, 13.5, ...,17.0 percent. That should be a total of 11 portfolios on the efficient frontier. The question asks which one of these is best to combine with the safe asset.
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The efficient frontier of risky asset portfolios is determined.
Portfolio Theory: Risky Assets
1. Explain each of following:
a) the efficient frontier
b) the capital market line
c) the security market line
2. Risky assets can be combined to form a risk-less asset. Discuss.View Full Posting Details