Question 3 (25 points) Assume there are initially only two assets in which to invest, A and B. Further assume no short- sale restrictions and that short-sale proceeds can be used to invest. The expected return of the market portfolio is given below. Market Portfolio Expected return rate = 14% The expected return and standard deviation of return of asset A and asset B are as follows: Asset A Expected return rate 18%, 0.10 Asset B Expected return rate -12%, - 0.06 Assume that correlation coefficient between the returns of assets A and B is -0.75, i.e., PAB- 0.75. (a) (5 points) What is the composition of the market portfolio? That is, determine the weight of asset A and asset B in the market portfolio. (b) (5 points) What is standard deviation of return of the market portfolio? (c) (5 points) What is the Sharpe ratio of the market portfolio if the risk-free rate is 4%? (d) (5 points) Assuming that the risk-free rate as well as the borrowing rate is 4%, a client, with total wealth $100,000, wants a portfolio with an expected return of 20%. How could you achieve the client's objective using the market portfolio? (e) (5 points) What is the standard deviation of the portfolio created in part (d)?

Question 3 (25 points) Assume there are initially only two assets in which to invest, A and B. Further assume no shortsale restrictions and that short-sale proceeds can be used to invest. The expected return of the market portfolio is given below. Market Portfolio Expected return rate =14% The expected return and standard deviation of return of asset A and asset B are as follows: Asset A Expected return rate =18%,=0.10 Asset B Expected return rate =12%,=0.06 Assume that correlation coefficient between the returns of assets A and B is -0.75 , i.e., AB= 0.75 . (a) (5 points) What is the composition of the market portfolio? That is, determine the weight of asset A and asset B in the market portfolio. (b) (5 points) What is standard deviation of return of the market portfolio? (c) (5 points) What is the Sharpe ratio of the market portiolio if the risk-free rate is 4% ? (d) (5 points) Assuming that the risk-free rate as well as the borrowing rate is 4%, a client, with total wealth 5100,000 , wants a portfolio with an expected return of 20%. How could you achieve the client's objective using the market portfolio? (e) (5. points) What is the standard deviation of the portfolio created in part (d)