Question a. and b. are not related to each other. a. An asset's reward-to-risk ratio is defined
Question:
Question a. and b. are not related to each other.
a. An asset's reward-to-risk ratio is defined as its risk premium divided by its standard deviation. It is a useful statistic to summarize the asset's risk-return trade-off. Consider the following information:Stock A has a reward-to-risk ratio of 0.4 and stock B has a reward-to-risk ratio of 0.33. Stock A's risk premium is 8%, stock B's risk premium is 10% and the market risk premium is 7%. The correlation between stocks A and B is 0.6. Assume the CAPM holds. Aportfolio consisting of stocks A and B has 20% more systematic risk than the market. Calculate the total risk of this portfolio.
b. Julia invests 20% of her wealth in the risk free asset and the rest in FB shares and BHC shares. The risk premium on FB shares is 10%, the risk premium on BHC is 7% and themarket risk premium is 8%. Julia's total portfolio of the three assets is 10% less risky thanthe market portfolio. Calculate the weight of FB in her portfolio. Assume that the Capital Asset Pricing Model holds.