Question

Given the following information, please address the following questions. Expected Sharpe return Std. Dev ratio Stock A 0.230 0.350 0.514 Stock B 0.120 0.250 0.280 Risk-free Rate 0.050 Optimal Portfolio O (Comprised of comprised of 57% investment in Stock A and the remaining in Stock 0.227 0.586 Correlation Between Stock A and B = If you want to use risky assets and the risky free T-bill to construct an efficient portfolio W with a return of 16%, the weight on stock A is

Show workings and answer to 3 decimal places thank you!

To the person who answered this question before. Dont :)

Answer 1

Return of Portfolio O (rO) = 0.183

Risk free rate (rf) = 0.050

Return of Portfolio W (rW) = 16%

Weight of portfolio-O (risky assets) in Portfolio-W = y

Weight of risk free asset in Portfolio-W = (1-y)

We can find value of y with following equation:

To*y+rf*(1 - y) = rw

To*y+rf-y*ry = rw

y* (ro-rf) =rwerf

y = "W -'s ro-rf

putting the value:

10.16 -0.05 9=0.183 -0.05

y = 0.827067669172932

y = 0.827

and

weight of risk free asset in Portfolio-W = 1-827 = 0.173

Weight of stock A in Portfolio-O = 0.57

Thus, Weight of Stock A in Portfolio-W:

= 0.827 * 0,57

= 0.471428571428571

=0.41

Hope it will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.