1a)Giventhe following,calculatetheportfolio’sexpected return, variance,andstandarddeviation.

1a)Giventhe following,calculatetheportfolio’sexpected return, variance,andstandarddeviation.

Assumethefollowingchangesoccur.

1b)As aMarkowitz-efficientinvestor, whichportfoliowouldyouprefer,theoriginalportfolioorthis portfolio,andwhy?

1c)Oncethesechanges occur, is this portfolionowriskless?Explain.

2)Youhaveaportfolioof twoassets, onewith anexpected returnof10%andastandarddeviationof returnof9%,theotherwithanexpectedreturnof 10%andastandarddeviationofreturnof 8%. Together,theyhaveacovarianceof-.0072. Theyareequally weighted intheportfolio.

Is itpossible tocreatea risklessportfolioundertheseconditions.Why?Beasthoroughaspossible.

3a)InCapitalMarketTheory, whatistheriskmeasurefor anindividual investment?

3b)Whyisthis so?

5)InCapitalMarketTheory, weassumed no transactions costs,whichseemed unrealistic.However, thereareinstanceswhere thisassumptionisnotcompletelyinvalid. Onesuchcaseis residential real estate,whereonlythesellertypicallypays acommissionforatransaction. Assumethe risk-freerateis

6%,salescommissions are3%, andthe SMLis apositively-sloped line(i.e. normal). Inwords, graphs,or both, explainhowthistypeof commissionwouldalterthe SMLandthe pricingofresidentialreal estate assets