Assume the expected return of the S&P 500 is 8% and the expected return for bonds is 5%. The T-Bill rate is 2%. The standard deviation of the S&P 500 is 25% while the standard deviation of bonds is 10%. The correlation between the S&P 500 and bonds is 0.50.

1) What allocation to the S&P 500 maximizes the Sharpe ratio?

2) Compare this Sharpe ratio to a 100% allocation to the S&P 500?

3) Redo Question with an expected return for the S&P of 10%. Describe the economic implications of this change in the S&P 500's expected return.

4) Redo Question with a correlation between the S&P 500 and bonds of -0.50. Describe the economic implications of this change in the correlation.

5) What is the global minimum variance portfolio?

Answer rating: 100% (QA)

1 The Sharpe ratio is maximized when the allocation to the SP 500 is determined by the Capital Allocation Line CAL tangent to the efficient frontier T... View the full answer