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3. Optimal portfolio choice with two risky asset and one risk-free asset: Jessica has $10,000. She can invest the money in (1) a corporate bond,
3. Optimal portfolio choice with two risky asset and one risk-free asset: Jessica has $10,000. She can invest the money in (1) a corporate bond, (2) a stock, and (3) the risk-free T- bill. The table below provides these assets' expected returns and standard deviations: Bond (D) Stock (E) T-Bill Expected Return 7% 14% 2% Standard Deviation 15% 25% 0 The coefficient of correlation (PDE) between the corporate bond and the stock is 20%. Jessica has a risk aversion A=4. (g) Suppose the coefficient of correlation between the stock and the bond decreases to 0. Would the change increase or decrease the Sharpe ratio of the optimal risky portfolio in question (b) and why? (5%) 3. Optimal portfolio choice with two risky asset and one risk-free asset: Jessica has $10,000. She can invest the money in (1) a corporate bond, (2) a stock, and (3) the risk-free T- bill. The table below provides these assets' expected returns and standard deviations: Bond (D) Stock (E) T-Bill Expected Return 7% 14% 2% Standard Deviation 15% 25% 0 The coefficient of correlation (PDE) between the corporate bond and the stock is 20%. Jessica has a risk aversion A=4. (g) Suppose the coefficient of correlation between the stock and the bond decreases to 0. Would the change increase or decrease the Sharpe ratio of the optimal risky portfolio in question (b) and why? (5%)
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