23 Jun WHAT IS THE RELATIONSHIP BETWEEN THE NUMBER OF ASSETS IN A PORTFOLIO AND ITS VARIANCE?
Topic: Markowitz and betas
Markowitz and betas Please give the definition and Answer the following questions with extensive discussions to the essay questions Please Note that the background workings of the numerical answers needed to be explained and discussion. 1. What is the relationship between the number of assets in a portfolio and its variance? 2. What are the two components of the total risk of a security? 3. Does diversification eliminate all risk? 4. Consider the following portfolios, with expected return E(R) and standard deviation ?, p{ E(R); ?}: X {3%; 3%} Y {5%; 7%} Z {8%; 5%} Q {5%; 2%} W {4%; 5%} a) Prepare a chart with all the portfolios, in a space of expected return and risk b) Two of the portfolios are in Markowit’z efficient frontier. Which ones are they? 5. What is the difference between the “Capital Market Line” and the “Security Market Line”? 6. Define the “separation principle”. 7. How can the optimal portfolio be found among the efficient set of risky assets, in terms of Markowitz? 8. Consider the historical monthly prices (May 2005 ? May 2010) for the following companies: SBUX, KFT and RNWK. a) Estimate each company’s covariance with the S&P500. b) Use a regression to estimate each company’s beta.
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