You are interested in a moderately aggressive investment with some high-risk assets. You decide to construct a complete portfolio (C) consisting of the optimal risky portfolio (O) and the U.S. T-bill (risk-free). The optimal risk portfolio (O) will include a Nasdaq tech stock (S) and a bond market fund (B):

• The expected return and standard deviation of S are 25% and 55%, respectively
• The expected return and standard deviation of B are 5% and 15%, respectively
• The correlation between S and B is 0
• T-bill rate is 2%

Based on the above information, you conclude that the optimal risky portfolio (O) should invest 36.00% in S and 64.00% in B. Accordingly, the expected return and standard deviation of the optimal risky portfolio (O) will be:

• The expected return on the optimal risky portfolio (O) is 12%
• The standard deviation of the optimal risky portfolio (O) is 22%

1.  Your risk aversion Find the proportion of the optimal risky portfolio (= y) in your complete portfolio (C).
2. What is the expected return and standard deviation of your complete portfolio (C)?
3. What is the Sharpe ratio for your complete portfolio (C)?

Answer rating: 100% (QA)

1 Using the formula for the expected return of a complete portfolio EC y EO 1 y Rf where EO is the e... View the full answer