You have gathered the following information about the returns on two stocks: A and B.

Statistics / Stock	A	B
Expected Return	12%	5%
Standard Deviation	24%	19%

The correlation between the two stocks is 0.4. The risk-free rate in the economy is 1%.

1. (1 point) What is the Sharpe ratio for Stock A and Stock B?
   • Show your calculation steps briefly and clearly.
2. (1 point) Calculate the optimal risky portfolio P*.
   • You do not need to show your calculation steps for this subquestion.
3. (1 point) Recalculate the optimal risky portfolio P* assuming the correlation between the two stocks is -0.5. Compare it with the result from Part B. What do you observe?
   • You do not need to show your calculation steps for this subquestion.
4. (1 point) Based on your observations above, briefly explain why stocks with a relatively low Sharpe ratio still have merits for investments.

Answer rating: 100% (QA)

1 point Sharpe ratio for Stock A Expected Return 12 Standard Deviation 24 Sharpe Ratio Expected Return RiskFree Rate Standard Deviation 12 1 24 05 Sha... View the full answer