38) PLEASE ANSWER BOTH PARTS:

PART A:

You've created a portfolio of two stocks with the following investment weights and returns:

	A	B	C
1		Stock A	Stock B
2	Weights	0.6	0.4
3
4	Year	Stock A	Stock B
5	1	5%	15%
6	2	-20%	-14%
7	3	-6%	-2%
8	4	5%	28%
9	5	14%	8%
10	6	3%	5%
11	7	4%	10%
12	8	-3%	11%

-What was the portfolio return in year 8 if you rebalanced the portfolio at the beginning of each year?

-What was the holding period return (total return over the 8 years) if you rebalanced the portfolio at the beginning of each year?

-What was the holding period return if you didn't rebalance the portfolio at all?

PART B:

Assume that there are only two stocks in the economy, stock A and stock B. The risk-free asset has a return of 3%. The optimal risky portfolio, i.e., the portfolio with the highest Sharpe ratio, is given below:

	A	B	C	D
1		Stock A	Stock B	Risk-free asset
2	Expected return	0.062	0.08	0.03
3	Variance	0.16	0.0484
4	Standard deviation	0.4	0.22
5	Covariance	0.0264
6
7	Optimal risky portfolio
8	Weights	0.03099	0.969	=1-B8
9	Expected return	0.0794		=B8*B2+C8*C2
10	Variance	0.04719		=B8^2*B3+C8^2*C3+2*B8*C8*B5
11	Standard deviation	0.2172		=B10^0.5
12	Sharpe ratio	0.2276		=(B9-D2)/B11

-What is the expected return of a portfolio composed of 20% of the optimal risky portfolio and 80% of the risk-free asset?

-What is the standard deviation of such a portfolio?