Question

Assume that the domestic and foreign assets have standard deviations of od= 16% and of=19%, respectively, with a correlation of pur=0.6. The risk-free rate is equal to 5% in both countries. The expected returns of the domestic and foreign assets are both equal to 10%, E(Rd) = E(R4) = 10%. Please show your calculations/cell formulas, explain your answer in answering the following questions (a, b, c): a. True or False: The Sharpe ratio for the domestic asset is 0.313 and the foreign asset is 0.263 Domestic Foreign 1 SD 16 TRUE The Sharpe Ratio for the domestic.... e Correlation 0.5 Risk Free 5 Exp Ret 10 5. Sharpe Ratios 0.313 0.263 19 0.5 5 10 - b. True or False: The Sharpe Ratio of an internationally- diversified portfolio equally invested in the domestic and foreign assets is 0.288

Answer 1

b. False. Sharpe ratio = 0.319

Calculation of expected return of portfolio = w1 * r1 + w2 * r2

where w1 = weight of domestic asset

r1 = return of domestic asset

w2 = weight of foreign asset

r1 = return of foreign asset

Expected return of portfolio = 0.5 * 10 + 0.5 * 10 = 10%

Standard deviation of portfolio =

(wi *oi+w * oz + 2w1W20102012)/2

= ((0.5)^2 * (0.16)^2 + (0.5)^2 * (0.19)^2 + 2(0.5)(0.5)(0.16)(0.19)(0.6))^1/2

= 15.67%

Sharpe ratio = Expected return - Risk Free rate / Standard deviation of portfolio

= 10 - 5 / 15.67 = 0.319