OPTIMIZATION AND DECISION MAKING

Optimization and decision making



Optimization and decision making

Answer # 4

The parameter values are: 1 = 1.33%, 2 = 1.52%, (1 = 4.56%, (2 = 6.47%, Rf = 0.5%.

Accordingly, (12 = (1(2 (correlation coefficient) = (4.56)(6.47)(0.57) = 16.82, (12 = 20.79, (22 =41.86.

(a) E(Rp) = 1.33w1 + 1.52w2

The variance of the portfolio is:

Var(Rp) = 20.79w12 + 41.86w22 + 33.63w1w2

Some possible portfolios are:

w1w2E(Rp)Var(Rp)

1.000.001.3320.79

0.750.251.3820.62

0.500.501.4324.07

0.250.751.4731.15

0.001.001.5241.86

(b) The optimal weights are w1 = 0.71 and w2 = 0.29.

(c) I = Rf + ((US

Here, ( = Slope of efficient set = (OIP - Rf )/ (OIP

OIP = (0.71)(1.33) + (0.29)(1.52) = 1.39%

(OIP2 = (0.71)2(20.79) ...