Consider the Following Data on the Returns from Bonds Develop and Solve the Markowitz Portfolio Model Using a Required

question 55

Essay

Consider the following data on the returns from bonds. $$\begin{array} { | l | c | c | c | c | c | c | c | c | } \hline { \text { Y ear } } \\\hline & \mathbf { 1 } & \mathbf { 2 } & \mathbf { 3 } & \mathbf { 4 } & \mathbf { 5 } & \mathbf { 6 } & \mathbf { 7 } \\\hline \text { Bon d 1 } & 0.200 & 0.026 & 0.121 & - 0.139 & - 0.167 & 0.135 & 0.152 \\\hline \text { Bon d 2 } & 0.128 & 0.100 & 0.125 & - 0.243 & 0.269 & 0.225 & 0.204 \\\hline \text { Bon d 3 } & 0.067 & 0.700 & 0.226 & - 0.184 & 0.234 & - 0.146 & 0.047 \\\hline\end{array}$$ Develop and solve the Markowitz portfolio model using a required expected return of at least 15 percent. Assume that the 8 scenarios are equally likely to occur. Use this model to construct an efficient frontier by varying the expected return from 2 to 18 percent in increment of 2 percent and solving for the variance. Round all your answers to three decimal places.

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Definitions:

Moral Hazard

A situation where one party takes risks because they know they will not have to bear the full consequences of their actions.

Divorce Insurance

A type of financial product designed to provide financial protection to individuals in case of a divorce, typically by paying a lump sum.

Marital Problems

Issues or conflicts arising between spouses that can affect the stability and health of the marriage.

Adverse Selection

A situation where asymmetric information results in high-risk individuals being more likely to participate in a contract, often seen in insurance markets.