Question 1
Consider two risky assets A and B with E(rA)= 15%, Sigma_A= 32%, E(rB)= 0.09, Sigma_B= 23%, corrA,B= 0.2. The risk free rate is 5%. The optimal risky portfolio of comprised of the two risky assets is to allocate 64% to A and the rest to B. What is the standard deviation of the optimal risky portfolio ?
Select one:
a. 20.75%
b. 23.61%
c. 22.86%
d. 23.00%
Question 2
Continued with previous question. What is the Sharpe ratio of the optimal risky portfolio?
Select one:
a. 0.33
b. 0.35
c. 0.31
d. 0.29
1). Standard Deviation = [{wA * S.D.(A)}2 + {wB * S.D.(B)}2 + {2 * wA * wB * S.D.(A) * S.D.(B) * Corr(A,B)}]1/2
= [(0.64 * 32%)2 + (0.36 * 23%)2 + (2 * 0.64 * 0.36 * 32% * 23% * 0.2)]1/2
= [419.4304%2 + 68.5584%2 + 67.82976%2]1/2
= [555.81856%2]1/2 = 23.61%
Option "b" is correct.
2). E(r) = [wA * E(rA)] * [wB * E(rB)]
= [0.64 * 15%] + [0.36 * 9%] = 9.6% + 3.24% = 12.84%
Sharpe Ratio = [E(r) - rF] / S.D.
= [12.84% - 5%] / 23.61% = 7.84% / 23.61% = 0.33
Option "a" is correct.
Question 1 Consider two risky assets A and B with E(rA)= 15%, Sigma_A= 32%, E(rB)= 0.09,...
Question 1 Consider two risky assets A and B with E(rA)= 15%, Sigma_A= 32%, E(rB)= 0.09, Sigma_B= 23%, corrA,B= 0.2. The risk free rate is 5%. The optimal risky portfolio of comprised of the two risky assets is to allocate 64% to A and the rest to B. What is the standard deviation of the optimal risky portfolio ? Select one: a. 20.75% b. 23.61% c. 22.86% d. 23.00% Question 2 Continued with previous question. What is the Sharpe ratio...
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