Assume that the investment possibilities are Stocks (S) and Bonds (B). Stocks have an expected return of 10% and a standard deviation of 18%. Bonds have an expected return of 4% and a standard deviation of 8%. The correlation coefficient between Stocks and Bonds is 20%. The return on the risk-free asset is 2%. Investors may borrow or lend at a risk-free rate.

 

a. Compute the Sharpe Ratio of a portfolio that consists of 50% Stocks and 50% Bonds.

 

b. Compute the composition of the optimal portfolio of Stocks and Bonds.

 

c. Compute the composition of the minimum-variance portfolio of S and B.

 

d. Peter (an investor) only wants to invest in the Stocks market and the risk-free asset. He wants to achieve a portfolio return of 8%. If Peter can borrow or lend unlimited amounts at the risk-free rate, what is the composition of his portfolio consisting of Stocks and the risk-free asset?

Answer rating: 100% (QA)

Answer Portfolio Analysis Were given information about stocks S and bonds B and need to analyze portfolios containing them Given Expected Return S 10 ... View the full answer