70.2K

Verified Solution

Link Copied!

please draw the standard deviation- expected return graph to explain

3. Portfolio theory II Consider an economy with a risk-free asset (bills) and two risky assets (bonds and stocks), where stocks are riskier and more rewarding than bonds, and bonds are more rewarding than bills. Adam, Bruno and Cate are three investors who face different borrowing conditions. Adam can borrow at the risk-free rate of interest, Bruno can borrow only at a higher rate and Cate cannot borrow at all. In answering the following, treat each question independently, and explain your reasoning A. Suppose that Adam and Bruno are both borrowing to buy risky assets on margin and Cate does not hold any bills. Can you determine which of the tree has the highest ratio of equities to bonds in their portfolio? Can you determine who has the lowest ratio of equities to bonds? B. Suppose that all three investors have the same preferences, and Cate has a higher ratio of equities to bonds in her portfolio than Adam. Can you determine whether or not Adam is borrowing? What about Bruno? 3. Portfolio theory II Consider an economy with a risk-free asset (bills) and two risky assets (bonds and stocks), where stocks are riskier and more rewarding than bonds, and bonds are more rewarding than bills. Adam, Bruno and Cate are three investors who face different borrowing conditions. Adam can borrow at the risk-free rate of interest, Bruno can borrow only at a higher rate and Cate cannot borrow at all. In answering the following, treat each question independently, and explain your reasoning A. Suppose that Adam and Bruno are both borrowing to buy risky assets on margin and Cate does not hold any bills. Can you determine which of the tree has the highest ratio of equities to bonds in their portfolio? Can you determine who has the lowest ratio of equities to bonds? B. Suppose that all three investors have the same preferences, and Cate has a higher ratio of equities to bonds in her portfolio than Adam. Can you determine whether or not Adam is borrowing? What about Bruno

Answer & Explanation Solved by verified expert

See Answer