Only Q3 with answer on Excel sheet.

Sheet1

.60%

0%

Tbills

Shares

Tbills

Tbills

Bonds 0.0027

Bonds

Shares 0.0008 0.0048

Shares 10%

Exp Ret
Std Dev

																																																																																																								Risk and return with three assets
		Asset Data					Exp Ret					Std Dev
							Tbills							0		4. Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	3
					Bonds	2.	10%		10.10%
							Shares		9.00%		20.80%
		VCV Matrix		Bons		Portfolio weights
	0.0018				0.0027				0.0008	40%
		0.0102				0.0048	50%
	0.0433
	Variance

Sheet2

Risk and return with three assets

Asset Data Exp Ret Std Dev

Tbills 0.60% 4.30%

Bonds

10.10%
Shares 9.00% 20.80%

VCV Matrix Tbills Bons Shares Portfolio weights

Tbills 0.0018 0.0027 0.0008 Tbills
Bonds 0.0027 0.0102 0.0048 Bonds
Shares 0.0008 0.0048 0.0433 Shares

Exp Ret
Std Dev

Variance

Targe exp return	7.00%
	2.10%

Sheet3

Asset Data Exp Ret Std Dev

3

0

2.10%

VCV Matrix Asset 0 Asset 1

Asset 0 0 0
Asset 1 0 0.0102

Asset 0

1.00%

Asset 1

0

Generic Portfolio Problems
Risk-free asset and one risky asset
Risk aversion coefficient (A)
			Asset 0		1.00%
			Asset 1	0.101
Optimal portfolio	Benefit
Weights
Return
Std dev

Question 3: On Sheet3 of Portfolios.xlsx you are given another portfolio with two assets: asset 0 and asset

1

. The expected returns of these two assets are respectively 1% and 2.1%. The standard deviations are 0 and 0.101, which means that asset 0 is a risk-free asset. Suppose now an investor’s benefit from investing in such a portfolio is , where and are as defined in Question 1 and is a risk aversion coefficient. Now the investor is maximizing his or her benefit by choosing the weights and in the portfolio. An optimization process gives us the optimal weight for asset 1 being:

. (1)

In this equation (Equation 1), is the expected return of asset 1 and is that of asset 0. is the variance of asset 1.

Requirements:

1. Use a user-defined function to calculate the optimal weights of asset 0 and 1. (3.0 pts)

2. Call the function and report the results in cell G11 and G12 of Sheet3. (1.5 pts)

3.

Calculate the value of benefits and report it in cell J8. (1.5 pts)

BONUS: Derive Equation (1) using all information given in this assignment. (1.5 pts)

1