Portfolio Management Formulas and Calculations

School: University of New South Wales - Course: ACST 3006 - Subject: Accounting

ACST3006 Assignment Name: Edmond Hui Student number:45324271 Question 1 To obtain graph we first find the portfolio expected value E(Rp) and portfolio standard deviation σ p and the two formulas are: E(Rp) =w1E(R1)+w2E(R2 ) σRp=√ w12Var(R1)+w22Var(R2) +2w1w2Cov(R1,R2 ) And use these formula in cell C9 and D9 accordingly, then formulate the data from weighting -500% to 750%. Then graph the in the {E(Rp)-Var(Rp )} graph. For the capital allocation line (CAL), we use the formula: p∗¿ R ¿ ¿ −B CE¿ D σ p∗¿ ¿ E(Rp)=E(Rp z ) +¿ To compute the covariance matrix (V), A, B, C, D: V= (0.010.002 0.0020.0025 ) V−1 = (119.476191−95.238095 −95.238095476.190476 ) A=(0.0150.008)(119.476191−95.238095−95.238095476.190476)(0.015 0.008 ) =0.0344 B=(0.0150.008)(119.476191−95.238095−95.238095476.190476)(1 1) =3.40476

C=(11)(119.476191−95.238095−95.238095476.190476)(1 1 ) =404.7619 D=|0.03443.40476 3.40476404.47619 | =2.32159 Therefore to compute σp*and E(Rp* ): Now we know thatE(Rp z ) =0.004 which is the risk free rate, hence: p∗¿ R ¿ ¿ −A ¿ p∗¿ R ¿ ¿ B∙ E¿ E(Rp z ) =0.004=¿ p∗¿ R ¿ ¿ −0.0344 ¿ p∗¿ R ¿ ¿ 3.40476∙E¿ E(Rp z ) =0.004=¿ p∗¿ R ¿ ¿ E¿