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An investor can design a risky portfolio based on two stocks, A and B. Use the following scenario: State of the Economy Probability Stock A
An investor can design a risky portfolio based on two stocks, A and B. Use the following scenario: State of the Economy Probability Stock A return Stock B return Boom 0.30 30% -6% Normal 0.50 18% 12% Bust 0.20 -5% 6% The T-bill rate of return is 4.25%. a) The proportion of the optimal risky portfolio that should be invested in stock A & B is what? b) The expected return on the optimal risky portfolio is what? c) The Sharpe ratio of the optimal risky portfolio is what? d) Investor wants to have an expected return of 8% for a complete portfolio. What proportion of his investment is in the complete portfolio (risk free, stock A and B)? e) Investor wants the highest expected return with a complete portfolio that has a standard deviation of 12%. What proportion of his investment is in the complete portfolio (risk free, stock A and B)? An investor can design a risky portfolio based on two stocks, A and B. Use the following scenario: State of the Economy Probability Stock A return Stock B return Boom 0.30 30% -6% Normal 0.50 18% 12% Bust 0.20 -5% 6% The T-bill rate of return is 4.25%. a) The proportion of the optimal risky portfolio that should be invested in stock A & B is what? b) The expected return on the optimal risky portfolio is what? c) The Sharpe ratio of the optimal risky portfolio is what? d) Investor wants to have an expected return of 8% for a complete portfolio. What proportion of his investment is in the complete portfolio (risk free, stock A and B)? e) Investor wants the highest expected return with a complete portfolio that has a standard deviation of 12%. What proportion of his investment is in the complete portfolio (risk free, stock A and B)
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