FINANCIAL ECONOMICS

SEMINAR 1: PORTFOLIO THEORY

1. Exam December 2009/10

Let us assume a one-period economy with 2 risky assets, A and B. Asset A has a rate of return
^

with mean 20% and standard deviation (or volatility) 35%. Asset B has a rate of return with
mean 10% and volatility 15%. The correlation between both returns is 0.5.
JAB =
0.5

a) If you had €1,000 and you wanted a 15% expected return, how would you invest your
money in both assets? Which is the return volatility of that portfolio?
b) If you had €1,000 and you wanted your portfolio return to have a volatility of 20%, in
which 2 portfolios of both assets could you invest your money? Which of the 2
portfolios would an investor with mean-variance preferences choose?
Hint: The solution of ax 2 + bx + c = 0 is x = −b ± b2 − 4ac 2a .

2. September Exam 2009/10

Consider an economy with one safe asset and one risky asset. The safe asset is a zero coupon
bond maturing in 1 year with a nominal of 100 euro and a price of 95,24 euro. The risky asset is
stock with a price today of 90,91 euro, and whose value in t=1 is a random variable with mean
100 euro and standard deviation 9,09 euro.

a) Translate the previous information into returns. In other words, show that the annual
interest rate of the bond is 5%, and the stock return has an expected value of 10% and
a standard deviation (or volatility) of 10%.

b) Draw the efficient mean-variance frontier of this economy.

c) What is the Sharpe ratio of the risky efficient portfolios?

d) A portfolio invests 150% in the bond and -50% in stock. Is this efficient?

e) Now consider instead an economy without the riskless asset , but with many risky
assets (for example, shares in other companies). Assume that the correlation between
their returns is 0. What happens to the return volatility of a portfolio with equal weight
in every risky asset as we add more and more assets to it?
 Fraction IMMSMOI In asset A ' Manera
}
1- . : WA
"
" " " B : ca -
wa , encontrar !!

I want that E[ RDI = 15%

EERDI =
WA .
EERAI + ( 1- WA ) -

EERBI
WA =
EERDI -

EERBI =
15% -
IC %
= 0.5

EERAI EERBI 20% 10%

-
-

WA =
0.5 → 500€

WB =
0.5 → 500€

>
Return VCIAEIUT Y : Op =
( WAOA ) +
CWBOB / 2+2 WAWB -

PÓAOB

= ¥75 =
22,22%

we want : Op = 20% →
% = UOÓ (% 2)

0J =
CWAOA /
2 +
CWBOB )
≥
+2 WAWBPÓAÓB

W¡ 0£ + ( WZ -11 -2W A) 02ps +2 WAPOAÓB -2W ÉIOAÓB

02 ≥
POAÓB ) Wta
p
=
( 0A -102ps -2 +
( 210a OB -20J) WA -102ps -0J =
O

er
' 925W 2A -175nA -175=0

saff?
vdjfs.la/2-bx-c=ODcrTfCUO1:WA-
'

<

}
=
0,396 "M " ^5 " '" H ne One W The highest Expecrea Depurn .

" 2 : wa , = -
a. yzz because they have eine Same ICMI of Risk

↳ sncrtsllllng ↳ EERD? = 14T

.

CINMST more than your wealth ) ETR 021=51 .

Mear -
variance pretendes :

2. now we do CCMDUML the E- ✗ Recrea .

Return ?

< ⇐ °)
PRICE value at F- 1 SD
DO P1

Safe Asset 95.24€ 100€ 9.09€

RLSCKY asset 90.91€ IOCE

✓#-)
Do
PI
VÍ)
-

EER;] = =
= Lanz
Porixed P
} PO
" ◦° -
95.24
=
EERSI =

95.24
5%

1°C -
90.91
EER r ? = = lo %
90.91

EERDI = CI -
Wr ) Rst WREERII

= Rstwr ( E [ RTI -

Rs )

Op =

ÚÍ+2wsw- =
TÚ =
cwrlor
?⃝
 RS
[
Ettdt ]
] gp 5% C. 5 Op
-

=
+
E- [ RDI =
Rs +
Or
↳ snarpe Ratio CRRSK premium)

the ettiaert mear -

varia el

tracio

↳ ✗

✗ el
debajo de la ercnrera, no escoges
= MIMI al riesgo escoges atado te
,
-
✗a no

da
esetiaerre,
+ RENTA .
MI
EFFIUENT
Un portfolio 9 M .

EE RPI =
1.5 ✗ 5% + CI -
I. 5) ✗ 10 =
2.5%

e) zero vallance =
sate .

Systematic =
affclt 911 c- hlastlt

2 [ ypes CERLSK { bicsyntatic =

. . . aueto diversificación
3. June Exam 2010/11

Consider an economy with two dates (1 period), with two risky assets, A and B. Asset A has a
rate of return with mean 12% and a volatility of 20%, while asset B has a rate of return with
mean 15% and a volatility of 25%. The correlation between the returns of asset A and asset B is
1.

a) Express the expected return on a portfolio composed of the two risky assets as a
function of the expected returns on each asset. Do the same for the volatility
(standard deviation) of the portfolio (as function of the volatilities of each asset).
Represent the efficient frontier in the mean-standard deviation space. Locate
assets A and B on the graph.

b) Assume the correlation between the returns on asset A and the returns on asset B
is 0 (not 1 as before!). Compute the expected return, volatility and the Sharpe ratio
of a portfolio, M, that invests 52.23% in asset A and the rest in asset B if we
introduce a bond paying a risk-free interest rate of 5%.

4. July 2016

Consider an economy with one period and two dates (t=0, t=1), a bond (asset 0) and two risky
assets (assets 1 and 2). The risk-free rate paid by the bond (interest rate) is r=5%. The risky asset
returns and characteristics are given in the table below:

Volatility (σj) Expected return

E(Rj)

Asset 1 6 6,08

Asset 2 23,32 15,88

Correlation between risky asset returns = Corr(R1, R2) = ρ12 = 0

-Which of the following portfolios is the tangency portfolio?

• Portfolio A: 20% in Asset 1, 80% in Asset 2

• Portfolio B: 60% in Asset 1, 40% in Asset 2
• Portfolio C: 80% in Asset 1, 20% in Asset 2
-Calculate the efficient portfolio for an expected return of 12%. Define clearly the investment
position in each of the 3 assets.

-What is the expected return of an efficient portfolio with the same volatility as asset 1
(σ=6%)?
 we are 91hr9 EWC ASHES ,
and they ask EC ccnscruct the EETIUCIT Frontier .

BCTH of them are RLSCVIYC -1-9^21 .

EERD 7-
=
WAEERPI +
CI -

WA ) EERBI

GICLEIUTY
país ÚCWAOAI 2+2 WAWBPOAOB ✓ CWAOATWBOTB / °
"

✓ >
Op = + ( WBOB / = =
WAÓA +
WBOB
" "
a
1- WA
La diferencia con que uno sea safe y otro risky, esq la volatilty del safe es 0. Si los dos son
risky, la volatily no es
ÓB
)(
◦☐ -

OP ÓB
(
-

WA =
→ EERPI =
EERBI + EERAI -

EERBI )
0A -

OB 0A -

OB
EERA ]
-

EERB ?

g) (
OB
EERPI =
EERBI -

( 0A -
EERA ] -
EERBI) +
0A -

OB
-
Steps : INTERCEPT
Y, , DE
1) EXDCCMOI R . Dcrtf . EERDI =
O t 0.6 Op

2) VCIACIUTY
3) SUBST .
VCIATIUTY ( WA ) in the EXDCUMD R .

EERD 7-
=
WAEERPI +
CI -

WA ) EERBI
WA -

EERD ] + EERBI -

EER B) ( WA )

ETRDIWA + =

2 rlsckyassets

SICDC =
Sharpe Ratio