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5. You want to construct a risky portfolio by investing your money into two risky assets. Asset S has an expected return of 14% with
5. You want to construct a risky portfolio by investing your money into two risky assets. Asset S has an expected return of 14% with a standard deviation of 24%. Asset B has an expected return of 6% with a standard deviation of 12%. The two assets have a correlation (p) of 0.55. 1) You put half of your money in both of the assets. What are the expected return and the standard deviation of the risky portfolio? 2) What's the Sharpe ratio by giving the risk-free rate is 2%? 3) How do you interpret the Sharpe ratio for this risky portfolio? 4) The risk premium in the market portfolio is 7% with a standard deviation of 15%. If the CAPM model can fully price the risky portfolio return (zero alpha). What's the value of the risky portfolio's CAPM beta (Bp)? 5) How do you interpret the Bp? 6) However, you find a positive alpha in the risky portfolio by applying the CAPM with historical data. What's the implication of your finding? Based on Arbitrage Pricing Theory, how does a rational and risk-averse investor act on this finding
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