Suppose two asset returns are described by a two factor model, n- 0% + 11 + 1.8/2 + e 12= -1% + 21 + 0.52+ 2 where the volatility of first factor is 30%, the volatility of the second factor is 10%, and the correlation between the two factors is 0.5. Suppose also that the volatilities of the error terms ej and e2 are both 10%. What is the covariance of and r2 ? (Nearest 0.0001).

Suppose two asset returns are described by a two factor model, n- 0% + 11 + 1.8/2 + e 12= -1% + 21 + 0.52+ 2 where the volatility of first factor is 30%, the volatility of the second factor is 10%, and the correlation between the two factors is 0.5. Suppose also that the volatilities of the error terms ej and e2 are both 10%. What is the covariance of and r2 ? (Nearest 0.0001).

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Assume that we have three assets. The first one has expected return μ1 = 10% and standard deviation of return equal to σ1 = 0.14. The second has expected return μ2 = 20% and standard deviation of return equal to σ2 = 0.2. The third asset has expected return μ3 = 15%. We would like to determine the range of the standard deviation of the third asset so that non of the asset dominates another. This range is an interval with a lower bound a and an upper bound b. What equals the lower bound a of the interval? Please insert your result with two decimals.
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