Analyze the optimality of the S&P 500 as a market portfolio for the tech market given in the table below.

1. Compute the covariance matrix.
2. What is the composition of the no-leverage portfolio that holds the 4 tech stocks and the S&P 500 and maximizes the portfolio Sharpe ratio?
3. What is the composition of the potentially levered portfolio that holds the 4 tech stocks and the S&P 500 and maximizes the portfolio Sharpe ratio?
4. Suppose that an investor holds the S&P 500 portfolio and wishes to add only one of the 4 tech stocks to this portfolio. Which stock would yield the highest Sharpe ratio for the investor?

You can assume that the latest risk-free rate is 0.08%.

					Correlations
	Market Caps (trillion)	Price	Expected return	Volatility	Alphabet	Amazon	Apple	Microsoft
Alphabet	$1.75	$2,653.64	20.90%	40.60%	1	0.87	0.75	0.92
Amazon	$1.49	$2,936.35	24.50%	49.20%	0.87	1	0.81	0.88
Apple	$2.59	$158.52	25.40%	35.20%	0.75	0.81	1	0.85
Microsoft	$2.14	$285.59	26.60%	39.10%	0.92	0.88	0.85	1
S&P 500			13.80%	26.80%	0.87	0.88	0.91	0.93

Answer rating: 100% (QA)

Here are the analyses 1 Covariance matrix 1660 1512 1410 157... View the full answer