The average return for Firm A is calculated as 0.05 (5%) with a standard deviation of 0.03. The

average return for Firm B is calculated as 0.15 (15%) with a standard deviation of 0.06. The

covariance between returns in Firms A and B is equal to -0.0005. The return on the risk-free

asset is 1%.

a) Fill in the table below.

Share in Share in Portfolio Expected Portfolio Standard Sharpe Ratio

Firm A   Firm B  Return       Deviation

 

100%     0%        5.00%          3.00%

 

80%       20%

50%      50%

20%      80%

0%        100%  15.00%       6.00%

b.) Plot the portfolio frontier on the graph of standard deviation vs. expected return. Identify

the point that maximizes the Sharpe Ratio, and note that point on your graph.