5-step proof

I feel no guilt in starting another thread as this is really work related.

OK so I've studied (memorized) the 5step method without dividends.

Is the only difference between the 5-step method with and without dividends, that with dividends every psi (i think, the one that says howmuch shares you've got) and every St gets a squiggle on top.

Would be nice.

Any reply would be reassuring at this point in time.

Erik

 

yup and the discounted asset price d(t) as well will have a squiggle.... can you help me with this doubt...its about lagrangian multipliers...cant remember the year the question came in ...the question has 3 assets....intially it says get lagrangian function and then the third part says asset 1 is not present...calculate the efficient portfolio...i cannot understand the solution...plz help

 

I also struggled with that one. If I remember correctly it was asset A that was not present anymore.
In the first part.
You should write down the Lagrangian function as usual.
Calculate all partial derivatives and set equal to zero.

In the last part you set xA (the amount invested in A) equal to zero and solve the equations you set up previously.

Hope that helps.
Erik

 

if asset 1 is not present, then i guess you just need to use the formula:

Vp is minimised when X_a = (v_b - C_ab)/(V_a + V_b - 2C_ab)

where a,b are the remaining 2 assets

 

I exactly did that but am not able to match the answers....but since you are the expert..I take your word....CT8 solutions are rubbish!!!!!!!!!

 

which year / question?

 

i think the "5 step" bit is not too bad, to me, the hard bit is getting from:

V_t = B_t E_Q(B_T^-1 X | F_t)

to the Black-Scholes solution (i.e. evaluating the expectation and getting to normal distn).

 

its A2004, Q8

 

It's wrong by my calculations, x2=76.9% and x2 = 23.1%

 

You can not use the xA formula Gareth suggested. It is wrong!
I don't know why, but I know its wrong and it gives the wrong answer.

(I also used the formula and got the same answer as Gareth)
I mailed an Acted Tutor about it, he gave an explanation with corner portfolio's. I don't follow his argument since I don't understand corner portfolio's, so I just dumped the question.

Sorry, that i'm not of that much help in this matter. Just do as I said and you'll get the right answer. It does make sense to use earlier parts of questions when you come to a later part.

Erik

 

we dont need to know about corner portfolios though, and i have no idea what they are!

 

No, they're not in the syllabus at all.

I'm off to bed.
Good luck tomorrow.
(What time is there, its 21:40 here, and I'm writing at 9:00 tomorrow)
Will post as soon as I can tomorrow.

Cheers.