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# Question Given the following information calculate the standard deviation of returns of a portfolio that combines government bonds with the market

Please answer attached file. Questions are here as well

Question

Given the following information calculate the standard deviation of returns of a portfolio that combines government bonds with the market portfolio.

Rm = .11

Rf = .05

Standard Deviation of market return = 0.11

Enter your answer as a decimal accurate to three decimal places.

Proportion invested in Rm = 0.5

Question-

Referring to the Capital Market Line (CML) which of the following strategies has the highest exprected return and the highest risk for the investor? Choose correct answer

- Invest all of her or his funds in Rm

- Invest in a portfolio of 50% in Rf and 50% in Rm

- Invest 75% in Rm and 25% in Rf

- Borrow at the riskless rate and invest his or her funds, plus the borrowed money in Rf

- Invest all his or her funds in the riskless asset

- Borrow at the riskless rate and invest his or her funds, plus the borrowed money in Rm

Question

With respect to the graph above (PBEHP, 12 Ed, page 191).

Which of the following statements is incorrect?

- The portfolios represented by the points on the line through Rf and M dominate the portfolios represented by the line Rf through T

- The lowest risk portfolio is a portfolio of 100% in government bonds, at point Rf

- For investors the levered (borrowing) portfolios from M up to N provide higher returns than the portfolios from Rf to M.

- The lines U1, U2, and U3 represent the utility function of three different investors, U1 represents a risk averse investor, U2 represents a risk neutral investor and U3 is a risk seeker

- To reach a point on the line Rf through to N, that is above M the weight or proportion of Rf must be negative

Question

With respect to the graph provided above (PBEHP 12th Ed, page 184) which of the following statements is incorrect.

- A risk-averse investor would prefer combinations on the hard red line represented by ρ1,2 = -1.0, as opposed to all of the other feasible combinations below this line

- Risk-averse investors would never hold combinations of the two securities represented by by points on the on the dotted lines

- When the correlation coefficient is -1, risk can be eliminated completely

- A risk-averse investor does not like risk and so would prefer to invest in the portfolio represented by the point where the expected return is .096 and the standard deviation is zero, because this portfolio has zero risk

- The degree of risk reduction increases as the correlation between returns on the two securities decreases coefficient

Question- Combining two securities whose returns are perfectly positively correlated (ie correlation coefficient is +1) results only in risk averaging and does not proved any risk reduction.

True

False