Question

Asked Jun 24, 2019

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Step 1

**Since you have asked a question with five sub parts, I will address the first three sub parts. Please post the balance sub parts as separate question.**

Part (a)

Proportion invested in Ford, w = 0.5

Proportion invested in Harley Davidson, 1 – w = 1 – 0.5 = 0.5

σ_{1} = Standard deviation of returns of Ford = 30.6%

σ_{2} = Standard deviation of returns of Harley Davidson = 15.8%

ρ = Correlation coefficient = 0.39

Step 2

Hence, Variance of the portfolio = σ_{p}^{2} = (w x σ_{1})^{2} + (1 – w)^{2} x σ_{2}^{2} + 2 x ρ x w x (1 – w) σ_{1} x σ_{2} = (0.5 x 30.6%)^{2} + (0.5 x 15.8%)^{2} + 2 x 0.39 x 0.5 x 0.5 x 30.6% x 15.8% = 0.03907786

Hence, standard deviation of the portfolio = σ_{p} = (Variance)^{1/2} = (0.03907786)^{1/2} = 19.77%

Step 3

Part (b)

Proportion invested in Ford, w1 = 1/3

Proportion invested in Harley Davidson, w2 = 1/3

The balance 1/3rd of the portfolio is invested in risk free asset that has standard deviation of 0%.

σ1 = Standard deviation of returns of Ford = 30.6%

σ2 = Standard deviation of returns of Harley Davidson = 15.8%

ρ = Correlation coefficient = 0.39

Hence, Variance of the portfolio = σp2 = (w x σ1)2 + (w2 x σ2)2 + 2 x...

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