Question: You have identified two securities, A and B, that you believe are mispriced. You have estimated alpha of stock A to be 5%, and the

You have identified two securities, A and B, that you believe are mispriced. You have estimated alpha of stock A to be 5%, and the firm specific error term to have a standard deviation of 30%. You estimated alpha of stock B to be -4% and the firm specific error term to have standard deviation of 40%. The market index fund has an expected return of 12% and standard deviation of 15%. The risk-free rate is 6%. What is the Sharpe ratio of the optimal risky portfolio that consist of securities A and B and the market index fund?

Step by Step Solution

★★★★★

3.42 Rating (142 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

The Optima Mutual Fund has an expected return of 20%, and a volatility of 20%. Optima claims that no other portfolio offers a higher Sharpe ratio. Suppose this claim is true, and the risk-free...

The market portfolio has an expected return of 12 percent and a standard deviation of 22 percent. The risk-free rate is 5 percent. a. What is the expected return on a well-diversified portfolio with...

An investment has an expected return of 12 percent per year with a standard deviation of 6 percent. Assuming that the returns on this investment are at least roughly normally distributed, how...

You have identified two securities, A and B, that you believe are mispriced. You have estimated alpha of stock A to be 3%, and the firm specific error term to have a standard deviation of 30%. You...

Hi. I can't understand the solutions to questions 7,11,13,19,24. Thanks Some practice questions for the final exam Corporate Finance Note: This is a fast production, I assume there is always one...

Please Provide a 2 to 3 page article review for each, there attached on this question. Your discussion should include a brief summary (including the big ideas or major points of the article) along...

There is an accompanying Excel spreadsheet with data that some of the questions below refer to. 1. Basic investments calculations: please turn in your work in the area of the spreadsheet designated...

I cannot get the answers to #1, 3, 19, or 27. Can you find the answers to any of them? Quiz #6: Stock Risk and Return Closes: Tuesday Nov 1st at 11:55pm 30 questions ...60 points Numerical Problems...

I need help to all the questions in the document attached. I'm trying to study for my final that is 1 day and these are crucial for me. Investment Management 333-693 Final Examination Seat No:...

Hey, you answered some questions a while ago but 5 of them were wrong. Is that possible for you make them right? Here are the questions: Red highlighting means wrong. QUESTION 1 An implication of the...

Q1 Q1 - Simple integrals 0 Integrate these functions. Write any fractions in their lowest form. 12 7x2 dx Q2 7xdx 0 9 2x* dx (2x3 + 7) dx y = (5x2 -4) dx y = Total 0 (8x2 + 7x) dx y = + 21Q1 Q2 -...

Coonsider the elements of the case and using the material discussed in week 1 about the Fair Labor Standards Act and the exemptions to the overtime rule, determine whether you believe the Shift...

1) How does the use of data help in planning the teaching-learning process? and based on the previous question, 2) what is the role of the use of data obtained in needs investigations? Please, No...

Discussion Question 1: How do you characterize your ethnic and racial heritage? What has been the nature of your interactions with other groups? Have your experiences been positive or negative? How...

Draw an arc which is tangent to two arcs using CAD software (for example, AutoCAD). Tangent

In a future career in the sports industry, you are placed in a position in which your decisions will impact internal and external stakeholders. Explain how you plan to apply leadership and management...

You have just won the lottery and will receive $570,000 in one year. You will receive payments for 21 years, and the payments will increase 5 percent per year. If the appropriate discount rate is 12...

Read Case Study Google: Dont Be Evil Unless and answer the following: Given its mission of providing information to the world, should Google censor searches in China?

George Stigler and Claire Friedland studied both unregulated and regulated electric utilities and found no difference in the rates they charged. One could draw the conclusion that regulation is...

Suppose it were proved that liquidity traps are not real and that investment is not interest insensitive. Would this be enough to disprove the Keynesian claim that expansionary monetary policy is not...

If there were no third parties in medical care, medical-care prices would be lower. Do you agree or disagree? Explain your answer.

Suppose a country has abundant capital but scarce labor. Which group would be more harmed by a trade embargo: owners of capital or laborers?

If capital is domestically scarce in a country, do you expect owners of capital in that country to be free-traders or protectionists? Why?

Suppose Egypt wants to open its trade borders to the world market for natural gas. What will determine whether Egypt becomes a net-exporter or net-importer of natural gas? If Egypt becomes a...