Problem 11

Intro

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	0.075	0.03
3	Variance	0.1521	0.0484
4	Standard deviation	0.39	0.22
5	Covariance	0.02574
6
7	Optimal risky portfolio
8	Weights	0.0609	0.939	=1-B8
9	Expected return	0.0742		=B8*B2+C8*C2
10	Variance	0.04619		=B8^2*B3+C8^2*C3+2*B8*C8*B5
11	Standard deviation	0.2149		=B10^0.5
12	Sharpe ratio	0.2057		=(B9-D2)/B11

Attempt 1/3 for 10 pts.

Part 1

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

Submit

Attempt 1/3 for 10 pts.

Part 2

What is the standard deviation of such a portfolio?