investment finance

Prob 6.08-11

Bodie, Kane and Marcus, Essentials,
Problem 6.08		by: D.Fricke, 2015
	Expected
	Return	S.D.
Stock Fund	15.0%	32.0%
Bond Fund	9.0%	23.0%
Correlation ( r )	0.150
RRF T-Bills	5.5%
Calcualtion of Expected Return and S.D. of Portfolio:
	Weights:		Portfolio:
	Stock	Bond	E( r )	S.D.
	100%	0%	15.00%	32.00%
	90%	10%	14.40%	29.23%
	0%	100%	9.00%	23.00%

Graph

Graph

0.32

0.2923357659

0.23

Optimum

Bodie, Kane and Marcus, Essentials,
Problem 6.09-10		by: D.Fricke, 2013
	Expected
	Return	S.D.
Stock Fund	15.0%	32.0%
Bond Fund	9.0%	23.0%
Correlation ( r )	15.0%
RRF T-Bills	5.5%
Calcualtion of Expected Return and S.D. of Portfolio:
Weight of B at OPTIMUM	0.3533724545	Calc'd Using Formula, Equation 6.10, Page 162
Weight of S at OPTIMUM	0.6466275455	Calc'd Using 1-WB
Weights:		Portfolio:				Reward to Variability Ratio
Stock	Bond	E( r )	S.D.
64.66%	35.34%	12.88%	23.34%			0.3162
	0.055	0
	0.061324189	0.02
	0.067648378	0.04
	0.0739725669	0.06
	0.0802967559	0.08
	0.0866209449	0.1
	0.0929451339	0.12
	0.0992693228	0.14
	0.1055935118	0.16
	0.1119177008	0.18
	0.1182418898	0.2
	0.1245660787	0.22
	0.1308902677	0.24
	0.1372144567	0.26
	0.1435386457	0.28
	0.1498628346	0.3
	0.1561870236	0.32
	0.1625112126	0.34

Optimum

0.32

0.2923357659

0.23

Don't really need to change anything on this page. Everything draws from the givens on first tab.

After copying down the formulas in the table on the first page, look at the graph below. (Tangent line is approximate.) Note how "best" R/V is not with the minimum variance combination!