Question 35

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You have the following scenario: Your risky portfolio has a 30% chance of earning a 25% rate of return, a 40% chance of earning a 15% rate of return and a 30% chance of losing 9%.

a) Calculate the expected return and standard deviation of this portfolio.

b) Assume the rate of return on a T-bill is 3.5%. Calculate the Sharpe ratio for the risky portfolio.

c) Alternatively, you could invest in a S&P500 ETF that has an expected return of 12% and a standard deviation of 16%. Explain which is better, your risky portfolio or the S&P 500 EFT?