You have gathered the following information about the returns on two stocks: A and B. Statistics /
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Question:
You have gathered the following information about the returns on two stocks: A and B.
Statistics / Stock | A | B |
---|---|---|
Expected Return | 12% | 5% |
Standard Deviation | 24% | 19% |
The correlation between the two stocks is 0.4. The risk-free rate in the economy is 1%.
- (1 point) What is the Sharpe ratio for Stock A and Stock B?
- Show your calculation steps briefly and clearly.
- (1 point) Calculate the optimal risky portfolio P*.
- You do not need to show your calculation steps for this subquestion.
- (1 point) Recalculate the optimal risky portfolio P* assuming the correlation between the two stocks is -0.5. Compare it with the result from Part B. What do you observe?
- You do not need to show your calculation steps for this subquestion.
- (1 point) Based on your observations above, briefly explain why stocks with a relatively low Sharpe ratio still have merits for investments.
Related Book For
Fundamentals of Investments, Valuation and Management
ISBN: 978-1259720697
8th edition
Authors: Bradford Jordan, Thomas Miller, Steve Dolvin
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