The expected returns of Deutsche Bank, Google, and GM are 8%,9%, and 12%, respectively. Furthermore, the variances of these three stocks are 0.04, 0.06, and 0.08, respectively. The three stocks are uncorrelated. The risk-free rate is 4%.

1. Calculate the Tangency portfolio weights of these three stocks and the mean, standard deviation, and Sharpe ratio of the Tangency portfolio (T). Why
2. If my risk aversion dictates that I am willing to only face a 10% standard deviation, what investment portfolio would you suggest I invest in? (be specific) What is the maximum Sharpe ratio I can achieve if I am only willing to face a 10% standard deviation? What is the expected return on this portfolio? Why

Answer rating: 100% (QA)

To calculate the tangency portfolio weights we need to first find the vector of excess returns ER fo... View the full answer