Investments, tenth edition

Expected Return

Standard Deviation

A

   10%

   20%

B

30

60

T-bills

 5

 0

The correlation coefficient between funds  A  and  B  is  2 .2. 

     a.   Draw the opportunity set of funds  A  and  B.   

    b.   Find the optimal risky portfolio,  P,  and its expected return and standard deviation.  

    c.   Find the slope of the CAL supported by T-bills and portfolio  P.   

    d.   How much will an investor with  A   5  5 invest in funds  A  and  B  and in T-bills?   

 CONCEPT CHECK 

7.3 

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6/18/13   8:11 PM

6/18/13   8:11 PM

Final PDF to printer

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P A R T   I I

  Portfolio Theory and Practice

8

 When short sales are prohibited, single securities may lie on the frontier. For example, the security with the high-

est expected return must lie on the frontier, as that security represents the  only  way that one can obtain a return 

that high, and so it must also be the minimum-variance way to obtain that return. When short sales are feasible, 

however, portfolios can be constructed that offer the same expected return and lower variance. These portfolios 

typically will have short positions in low-expected-return securities.