1. Do you agree the below statement? Why or why not?
The risk free asset is default free but it is obviously a ected by the di erence between nominal interest and real interest.
2. What is a complete portfolio?
3. Please explain the difference between asset allocation and capital allocation.
4. Suppose that you construct a complete portfolio and your assets (or portfolios)are equally weighted. A risk free rate of return is 5%. An expected rate on a risky portfolio andstandard deviation of this risky portfolio are 9% and 20% respectively.
1. What is the expected return on the complete portfolio?
2. What is the standard deviation of this portfolio?
3. Compute how much this excess return can be compensated by its portfolio risk?
5. (40 points) You learned a rate of return on a complete portfolio, which is given by
rc = yrp + (1 y)rf
1. From the above equation, you are able to consider two investment positions, a leverage position and a short-selling positing. Please explain how you can make a leverage position and a short-selling position.
2. Using the above equation, derive an equation describing Capital Allocation Line.
6. You are asked to analyze the performance of two stocks (Bank of America and JP Morgan) using sample data from Jan. 2007 to Dec. 2017. The below table summarize the average stock returns and standard deviations for them. If a risk free rate is now 1%, which stock would be better performing and why? (Hint: Compute Sharpe Ratios for two stocks and compare them.
Bank of America J.P. Morgan
Mean 0.050 0.065
Std. Deviation 0.030 0.042
Sharpe Ratio