Question

Q7-Consider the following combination of expected return and risk for various portfolios (named A-H) on the risk-return diagram. Assume a risk-free rate of 12% where one may borrow or lend at this rate. Expected Return (%) Risk (%) A 10 23 B 12.5 21 C D E F G H 15 16 17 18 18 20 25 29 29 32 35 45 Sharpe Ratio 1. Which of the above portfolios has the highest Sharpe ratio? (Must express in percentage) (5pts.) To calculate the Sharpe ratio, subtract the risk-free rate of 12% from each portfolio's return and divide that by the standard deviation. The Portfolio F has the highest Sharpe ratio: Excess return Sharpe ratio = - - = .1875 = 18.75% standard deviation 2. Suppose an investor can lend/borrow at the risk-free rate. Assume the investor can tolerate at most 25% risk in any constructed portfolio. What is the best strategy for the investor? Must show work.(20 pts.) Hint: You may want to treat this a problem in efficient frontier in the presence of a risk-free asset!

Answer 1

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port folio f" hes highest shoppe sabo. 2 seppose investor con land / banow at risk free rote 12%. and investan can tolerate a risk of 251 This Anstvenis besed on capital'allocation line_owbelis effguere informatieases se_ ble Leather to combinere sottelligent secmitere) for this we have to identify which of the given - Pantfalio's are efficient (as inefficient notes _So this following basis the case dental decide Portfolio - is efficient ' ° Enefficient Bose is t pant plic is efficient 2 there is no other طعنطمنامطلحمه طعنه higher return with higher Sewn with sõme_setwin with lower risk some wska low risk - 1 sem Zdentification far falios etliciest Lecllicient Enefficant efficient eu Reno dominated by B __daraincted by E -ellaciest En efficient Lekicient efficient dominated b IS En efficient efficient

There are B, C, E, F, it are efficient pastfolio's. we have to combine Rf with efficient securities (ar) pastfolios which are lying on markowity efficiency frontier (B,C,E, f, 4 ] in such a way that the dish of the postiglio is - Oppe becaution security ve dave to realisme Create combinations to have a pf_histu 25.4 25 - wsec. I see Opf = 251 Userne 25_ Osec we sow creat o combinations by combining Rf with risky assets [B,C,E, f & H]. au of them will have the same pf - risk of 251. combinoligone bec tree wtf = 1- 2500 Rep wap XRp thibetler ff& B wg z laden Wife-44e1, p 14]]+95x12.5 (1- 25/01) = 12.601 Rf&c_ WG2_26/95 b ff - Rpp- [0x12.% + 25x15 = 15-44 RAE_ BE - 25/09 Wff-4/24 Ref =[+/29x12 + 25/29817] : العملے Reff _WF2_25/22 w ff- 7/32_RPF-474212 +2432x3] - 16694_ LRF4H WH = 25/45_ Wff = 2045_Rpp = [246.212 + 2546 X20] 16.444 manage and the above combinahas the highest peluanh 16.694. So which is earned by investing in combination of Rf4 f.