Suppose there are 2 stocks in the market, stocks A and C, with the following properties:...

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Suppose there are 2 stocks in the market, stocks A and C, with the following properties: Expected Return Standard Deviation TA = 5% A = 10% TC = 20% oC = 40% A C The returns on stocks A and C are not correlated. There is a riskless asset with guaranteed return of 3%. Suppose there are two investors, X and Z, who maximize risk-return tradeoff and have mean- variance preferences. Investor X can only invest in stocks A and C. Investor Z, in addition to being able to invest in stocks A and C, can also invest in the riskless bond. Investor X targets standard deviation of 20% and investor Z targets standard deviation of 12%. (a) What is the maximum Sharpe ratio investor X can achieve? (b) What is the maximum Sharpe ratio investor Z can achieve? (c) Describe the portfolio of investor Z. What is the expected return of this portfolio? (d) If investor X had access to the risk-free asset, could her return have been improved? If yes, compute the expected return for a 20% target level of risk. Suppose there are 2 stocks in the market, stocks A and C, with the following properties: Expected Return Standard Deviation TA = 5% A = 10% TC = 20% oC = 40% A C The returns on stocks A and C are not correlated. There is a riskless asset with guaranteed return of 3%. Suppose there are two investors, X and Z, who maximize risk-return tradeoff and have mean- variance preferences. Investor X can only invest in stocks A and C. Investor Z, in addition to being able to invest in stocks A and C, can also invest in the riskless bond. Investor X targets standard deviation of 20% and investor Z targets standard deviation of 12%. (a) What is the maximum Sharpe ratio investor X can achieve? (b) What is the maximum Sharpe ratio investor Z can achieve? (c) Describe the portfolio of investor Z. What is the expected return of this portfolio? (d) If investor X had access to the risk-free asset, could her return have been improved? If yes, compute the expected return for a 20% target level of risk.

Answer rating: 100% (QA)

To calculate the maximum Sharpe ratio for each investor we need to find the optimal portfolios that maximize the riskreturn tradeoff The Sharpe ratio is defined as the ratio of excess return to the st... View the full answer