• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Sept 2006 Exam : Q6 ii

J

jensen

Member
What does the (Expected return - 5%)/std dev has anything to do with the suggested solution? Initially, I thought they assume it's CAPM so I used the formula for the proportion of A as:

x_a = (V_b - Covariance)/(V_a + V_b - 2Covariance)

such that x_a + x_b = 1

but obviously I got tricked.
 
S2006 Q6 ii

(E - 5)/ sigma is called the Market price of risk and you are dead right that we use this in CAPM. You will see it in the capital market line on page 43 of the Tables.

MVPT, and finding the efficient frontier, is about maximising expected return for a given level of risk or, equivalently, minimising risk for a given level of expected return. Whatever way you look at it, we can achieve this by maximising the market price of risk. So, we express MPR as a function of xA and then choose xA to maximise this fucntion. ie differentiate set to zero etc.

John
 
Back
Top