Portfolio Management

765N1 Problem set 4

Question 1. Consider the following two investment options:

Option A Option B
Prob. Return Prob. Return
1/4 5 1/2 5
1/4 6 1/4 12
1/2 20 1/4 20

Which option comprise the FSD efficient set?

Question 2. Consider the following two investment options:

Option A Option B
Prob. Return Prob. Return
1/4 -2 1/4 -1.5
1/4 0 1/4 -1
1/4 2 1/4 2.5
1/4 3 1/4 3

a. Which option comprise the FSD efficient set?

b. Which option comprise the SSD efficient set?

Question 3. Suppose we have two random variables x̃ and ỹ, where P (x = 2) = 1/2
P (x = 5) = 1/2, P (y = y1 ) = 1/2, and P (y = y2 ) = 1/2.

a. What are the smallest values of y1 and y2 for which y dominates x by FSD?

b. What are the smallest values of y1 and y2 for which y dominates x by SSD?