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Math Help - Help please fast!! Portfolio theory

  1. #1
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    Red face Help please fast!! Portfolio theory


    1. Mr B. Shrewd has recently inherited 350,000 and is looking at ways to invest the money.

    He is aware of portfolio theory and the importance of the market portfolio. From his research he discovers the following:


    Security
    expected return
    standard deviation

    Market portfolio
    12%
    3%

    Share A
    10%
    4%

    Share B
    13%
    6%

    Share C
    17%
    6.5%

    Risk free
    4.5%
    0%
    (a) If Mr Shrewd is prepared to accept risk equivalent to a standard deviation of 6% how should he invest his money? What will the expected return of his investment be?
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  2. #2
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    Quote Originally Posted by little_nina View Post
    1. Mr B. Shrewd has recently inherited 350,000 and is looking at ways to invest the money.

    He is aware of portfolio theory and the importance of the market portfolio. From his research he discovers the following:


    Security

    expected return


    standard deviation


    Market portfolio

    12%


    3%


    Share A

    10%


    4%


    Share B

    13%


    6%


    Share C

    17%


    6.5%


    Risk free

    4.5%


    0%


    (a) If Mr Shrewd is prepared to accept risk equivalent to a standard deviation of 6% how should he invest his money? What will the expected return of his investment be?
    If I'm reading this right, you want to maximise the % return while keeping standard deviation at 6%. It looks to me then like you want a combination of Market portfolio and Share C ....

    In which case you should solve the following two equations to get the required proportion of each investment:

    \alpha (6.5) + \beta (3) = 6 .... (1)

    \alpha + \beta = 1 .... (2)

    Do this and then calculate the expected return. I get an expected return of approximately 16.3%.
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  3. #3
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    Red face

    ye thats how i did it origionally. and got the same return. but i was wondering if there is a synergy effect. for example if you invest in two shares then the risk is reduced because you are diversifying? but then i dont know if there is a formula to work that out. I think i will probably just go with that though

    Than you
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