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(Solved) Info from book: Andrea Corbridge is considering forming a portfolio consisting of Kalama Corp. and Adelphia Technologies. The two corporations have a...

I have attached both info/questions from book and answers. I know the answers are correct and have attached them to make it easier for you,Â but I need to know how this exact solution in bold belowÂ (optimal combination 53% and 47%) was found from 98 possibilities so I can show my work or explain.

**The optimal combination of Kalama and Adelphia is 53% and 47%, respectively. This results in a risky portfolio return of 18.74% and a standard deviation of 17.65%. As Andrea wants to earn a return of 19%, she will need to borrow money at the risk-free rate.**Â Â

Info from book: Andrea Corbridge is considering forming a portfolio consisting of Kalama Corp. and Adelphia

Technologies. The two corporations have a correlation of -0.1789, and their expected returns and

standard deviations are as follows:

Kalama

Corp. Adelphia Technologies Expected return (%) 14.86 23.11 Standard Deviation (%) 23.36 31.89 1. Calculate the frontier for all possible investment combinations of Kalama Corp.

and Adelphia Technologies (from 0% to 100%, in 1% increments). Determine the

optimal risky portfolio if the risk-free rate is 3%.

2. Andrea has $50,000 and wants to earn a 19% expected return on her investment.

What is the optimal manner in which to structure her portfolio-both in dollar

amounts and in weights relative to her $50,000-based on the preceding

information? Answers: #1

Weight/Kalama Weight/Adelphia

99%

98%

97%

96%

95%

94%

93%

92%

91%

90%

89% 1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11% Standard Deviation

23.07%

22.79%

22.51%

22.23%

21.96%

21.70%

21.44%

21.18%

20.94%

20.69%

20.46% Expected Return

14.94%

15.03%

15.11%

15.19%

15.27%

15.36%

15.44%

15.52%

15.60%

15.69%

15.77% 88%

87%

86%

85%

84%

83%

82%

81%

80%

79%

78%

77%

76%

75%

74%

73%

72%

71%

70%

69%

68%

67%

66%

65%

64%

63%

62%

61%

60%

59%

58%

57%

56%

55%

54%

53%

52%

51%

50%

49%

48%

47%

46% 12%

13%

14%

15%

16%

17%

18%

19%

20%

21%

22%

23%

24%

25%

26%

27%

28%

29%

30%

31%

32%

33%

34%

35%

36%

37%

38%

39%

40%

41%

42%

43%

44%

45%

46%

47%

48%

49%

50%

51%

52%

53%

54% 20.23%

20.00%

19.78%

19.57%

19.37%

19.18%

18.99%

18.81%

18.64%

18.47%

18.32%

18.17%

18.03%

17.90%

17.78%

17.67%

17.58%

17.49%

17.41%

17.34%

17.28%

17.23%

17.19%

17.16%

17.14%

17.14%

17.14%

17.16%

17.18%

17.22%

17.26%

17.32%

17.39%

17.47%

17.55%

17.65%

17.76%

17.87%

18.00%

18.14%

18.28%

18.43%

18.60% 15.85%

15.93%

16.02%

16.10%

16.18%

16.26%

16.35%

16.43%

16.51%

16.59%

16.68%

16.76%

16.84%

16.92%

17.01%

17.09%

17.17%

17.25%

17.34%

17.42%

17.50%

17.58%

17.67%

17.75%

17.83%

17.91%

18.00%

18.08%

18.16%

18.24%

18.33%

18.41%

18.49%

18.57%

18.66%

18.74%

18.82%

18.90%

18.99%

19.07%

19.15%

19.23%

19.32% 45%

44%

43%

42%

41%

40%

39%

38%

37%

36%

35%

34%

33%

32%

31%

30%

29%

28%

27%

26%

25%

24%

23%

22%

21%

20%

19%

18%

17%

16%

15%

14%

13%

12%

11%

10%

9%

8%

7%

6%

5%

4%

3% 55%

56%

57%

58%

59%

60%

61%

62%

63%

64%

65%

66%

67%

68%

69%

70%

71%

72%

73%

74%

75%

76%

77%

78%

79%

80%

81%

82%

83%

84%

85%

86%

87%

88%

89%

90%

91%

92%

93%

94%

95%

96%

97% 18.77%

18.94%

19.13%

19.32%

19.53%

19.73%

19.95%

20.17%

20.40%

20.64%

20.88%

21.12%

21.38%

21.64%

21.90%

22.17%

22.44%

22.72%

23.00%

23.29%

23.58%

23.88%

24.18%

24.84%

24.79%

25.10%

25.41%

25.73%

26.05%

26.38%

26.70%

27.03%

27.36%

27.70%

28.04%

28.38%

28.72%

29.06%

29.41%

29.76%

30.11%

30.46%

30.82% 19.40%

19.48%

19.56%

19.65%

19.73%

19.81%

19.89%

19.98%

20.06%

20.14%

20.22%

20.31%

20.39%

20.47%

20.55%

20.64%

20.72%

20.80%

20.88%

20.97%

21.05%

21.13%

21.21%

21.30%

21.38%

21.46%

21.54%

21.63%

21.71%

21.79%

21.87%

21.96%

22.04%

22.12%

22.20%

22.29%

22.37%

22.45%

22.53%

22.62%

22.70%

22.78%

22.86% 2%

1% 98%

99% 31.17%

31.53% 22.95%

23.03% #2

The optimal combination of Kalama and Adelphia is 53% and 47%, respectively. This results in a risky

portfolio return of 18.74% and a standard deviation of 17.65%. As Andrea wants to earn a return

of 19%, she will need to borrow money at the risk-free rate. 0.19 = (1- wm) .03 + wm .1874

wm = 101.65% Of the $50,000 Andrea has, she should place 101.65%, or $50,825.92 in the optimal portfolio of

Kalama and Adelphia. Thus, she needs to borrow $825.92 at the risk-free rate.

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