A company is evaluating a potential investment opportunity. The investment has an expected return of 12% and
Question:
A company is evaluating a potential investment opportunity. The investment has an expected return of 12% and a standard deviation of 8%. The company's risk-free rate is 5%, and its market risk premium is 7%. Assuming that the investment is independent of the company's existing portfolio, answer the following questions:
a) What is the investment's Sharpe Ratio?
b) If the company invests 60% of its portfolio in the risk-free asset and 40% in the investment, what is the expected return and standard deviation of the company's portfolio?
c) What is the probability that the company's portfolio will earn a return of at least 10%?
Show all calculations and round your answers to two decimal places.
Fundamentals of Financial Management
ISBN: 978-0324664553
Concise 6th Edition
Authors: Eugene F. Brigham, Joel F. Houston