Question 1: Consider the following data: Problem Set 5 Foundations of Finance Due Date: 26 October....

Question 1:
Consider the following data:

Problem Set 5 Foundations of Finance Due Date: 26 October. 2020

Expected Return 0.16 = 16%
0.14 = 14%
0.12 = 12%

Standard Deviation 12%

A Fund
B Fund
C Fund
The correlation between the returns on the A Fund and the C Fund is .7.
The rate on T-bills (which will represent the “risk free” asset) is 6%. Which of the following portfolios would you prefer to hold in combination with T-bills and why? (a) A Fund

(b) B Fund
(c) C Fund
(d) A portfolio of 60% in the A Fund and 40% in the C Fund.

Expert Solution

The return of porfolio of A and C is as follows:

The expected risk on the portfolio is as follows:

The return on Stock A is 16%, that is higher than the other alternative options

So, as per markowitz theory we would like to invest in Stock A with free interest rate bond beuause their expected return is higher than the other options

jeff jeffy answered 2 years ago

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