You have access to the following three stocks: Asset Expected Return Standard Deviation Stock A 10% 20% Stock B 15% 40% Stock C 20% 80% In addition, you know that stocks A, B, and C are uncorrelated with each other. There is also a riskless asset that yields 5%. You may use Excel in order to answer the questions below.

(a) Compute the weights of the tangency portfolio.

(b) Compute the Sharpe ratio of the tangency portfolio.

(c) Can you find a portfolio with a higher Sharpe ratio? Why or why not?

(d) How does the answer to (c) depend on the CAPM being true?

(e) Draw a graph (expected return vs. volatility) showing all the three assets and the tangency portfolio. Sketch the efficient frontier of risky assets. Draw the capital allocation line.

(f ) Assume now that the CAPM holds. Compute the betas of the three assets and draw an expected return vs. beta graph. Show the three assets and the tangency portfolio on this graph.

Answer rating: 100% (QA)

To solve this problem we will use Excel to compute the weights of the tangency portfolio the Sharpe ratio of the tangency portfolio and the other requ... View the full answer