Homework #2 – due Wednesday, November 7th, in class
1) Two-Asset Portfolio Choice (3 points each)
2) The Efficient Frontier (3 points each)
-Dropping the risk-free asset causes the investor’s portfolio to move “down” the “hill of happiness” (i.e., they get less utility from the portfolio with no risk-free asset). Can you explain this result in the context of constrained optimization?
-What are the portfolio weights on the risk-free asset and the tangency portfolio in portfolio p**? Explain the portfolio strategy in terms of borrowing or lending.
3) Portfolio Optimization in Excel (7 points)
Download the file “HW2.xlsx” from Blackboard. For all problems, assume limitless borrowing and lending at the risk-free rate, and no restrictions on short-selling. The risk-free rate is 10%.