Problem 3

Table below shows the historical returns for Companies A, B and C

Year A B C

1 30% 26% 47%

2 7% 15% -54%

3 18% -14% 15%

4 -22% -15% 7%

5 -14% 2% -28%

6 10% -18% 40%

7 26% 42% 17%

8 -10% 30% -23%

9 -3% -32% -4%

10 38% 28% 75%

11 27.0% 23.4% 42.3%

12 6.3% 13.5% -48.6%

13 16.2% -12.6% 13.5%

14 -19.8% -13.5% 6.3%

15 -12.6% 1.8% -25.2%

16 9.0% -16.2% 36.0%

17 23.4% 37.8% 15.3%

18 -9.0% 27.0% -20.7%

19 -2.7% -28.8% -3.6%

20 34.2% 25.2% 67.5%

1. If one investor has a portfolio consisting of 70% Company A and 30% Company B, what are the average portfolio return and standard deviation? What is Sharpe ratio if the riskfree rate is 3.5%?

2. If another investor has a portfolio consisting of 1/3 Company A, 1/3 Company B and 1/3 Company C, what are the average portfolio return and standard deviation? What is Sharpe ratio if the risk-free rate is 3.5%?