Answer Happy

EXERCISES ON DIVERSIFICATION Use Figure 1.11 to help you answer questions 1, 2, 3 and 4. 1. The retums from two investments I, and I have been estimated as follows: Figure 1.11 shows a graph of the mean and standard deviation for all possible portfolios involving I, and I. (It is advisable to check some of the computa- tions directly. If you do, bear in mind that the standard deviations given by calculators usually presume historical data is being used and will give, in Table 1.13 PROBABILITY 1 15% 2 -3% 2 22% 2 9% 2 고 : 1 1 1 12 3% 7% 4% 5% 11% 12 7% 10 Return 2 Figure 1.11 Standard Don Harvard Business School note 9-154-115. Professor David Mill prepared the exercises as the basis for dem discussion. Copyright © 1984 by the President and Fellows of Harvard College Exercises on Diversification 31 this case, values that are too big by a factor of 1.12.) What is the lowest standard deviation achievable from a portfolio of 11 and 12? What is the expected return on this portfolio? What proportion of the portfolio is in 11? 2. If a risk-free investment, Lo, returning 6% is also available, in what propor- tion will investors hold I, and 1,?