Suppose you invest $15,000 in an S&P 500 Index fund (S&P fund) and $10,000 in a total
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Question:
Suppose you invest $15,000 in an S&P 500 Index fund (S&P fund) and $10,000 in a total bond market fund (Bond fund). The expected returns of the S&P and Bond funds are 8% and 4%, respectively. The standard deviations of the S&P and Bond funds are 18% and 7% respectively. The correlation between the two funds is 0.40. The risk-free rate is 2%.
- What is the expected return on your portfolio? What is the standard deviation on your portfolio?
- What are the Sharpe ratios for your portfolio and the S&P fund?
- Why is it not surprising that your portfolio has a higher Sharpe ratio than either the S&P fund or Bond fund?
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