Question: Suppose that all stocks can be grouped into two mutually exclusive portfolios (with each stock appearing in only one portfolio): growth stocks and value stocks.

  1. Suppose that all stocks can be grouped into two mutually exclusive portfolios (with each stock appearing in only one portfolio): growth stocks and value stocks. The risk free rate is 3.5%. Assume that these two portfolios are equal in size (market value), the correlation of their returns is equal to 0.6, and the portfolios have the listed characteristics. Calculate the Sharpe Ratio for each. What is the expected return of the market portfolio?

Expected

Return

Volatility

Value Stocks

0.12

14%

Growth Stocks

0.15

24%

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