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Part B: 1. Consider an eight security universe with a constant correlation across all eight...

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Part B: 1. Consider an eight security universe with a constant correlation across all eight securities of p = 0.50. The return of the risk free security is rf = 2%. The returns and standard deviations for the eight securities are as follows: N 1 u2 3 114 115 16 10.16 0.14 0.14 0.11 0.11 0.10 0.10 L0.06 101 02 03 04 05 06 07 408 10.107 0.10 0.08 0.10 0.05 0.08 0.05 L0.08 O 01 9.9 Lug a) If short selling is allowed, determine the optimal allocation across each security in the construction of the risky portfolio (6 marks). b) If short selling is not allowed determine the optimal allocation across each security in the construction of the risky portfolio. (6 marks)

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