What is the non-arbitrage principle?
Explain why might it be a good idea to invest in assets that covariates negatively?
Explain what the problem with the covariance as a measure of relation is and what is the measure that corrects this problem.
You have two assets with standard deviation of returns, 2% and 3%, respectively for assets 1 and 2. If you invest 30% in asset one and the covariance between them is 0.5, what is the standard deviation of this portfolio?
If the weights on your portfolio composed of three assets are 20%, 30% and 50% and the expected return on the same assets are 4%, 6% and 7.5%. what is the expected return on the portfolio?
Compute the correlation between assets A and B IF YOU KNOW THAT THE STANDARD DEVIATION OF B is 50% of the standard deviation of A and the covariance between the two assets is 0.5 times the variance of asset A.
You have three assets A,B and C. The expected returns on those assets are 5%, 8% and 12%. The standard deviations are 2%, 4% and 10%. Your decide to invest 20%,45% and 35% in assets A,B,C, respectively.
What is the expected return on the portfolio?
What is the variance on the portfolio if the covariance among all the assets are zero?
An analyst tells you that the covariances were not well computed. Those are not all zero. The information he provides you is that the correlation between assets A and B is 0.5. all the other correlations are zero, as before, what is the new variance on the portfolio if you use this information?
Sample Solution
