Assume that the investment possibilities are Stocks (S) and Bonds (B). Stocks have an expected

return of 10% and a standard deviation of 18%. Bonds have an expected return of 4% and a

standard deviation of 8%. The correlation coeffcient between Stocks and Bonds is 20%. The

return on the risk-free asset is 2%. Investors may borrow or lend at the risk-free rate.

1.Compute the the Sharpe Ratio of a portfolio that consists of 50% Stocks and 50% Bonds.

2.Compute the composition of the optimal portfolio of Stocks and Bonds

3.Compute the composition of the minimum-variance portfolio of S and B

4.

Selma (an investor) only wants to invest in the Stocks market and the risk-free asset. She

wants to achieve a portoio return of 8%. If Selma can borrow or lend unlimited amounts

at the risk-free rate, what is the composition of her portfolio consisting of Stocks and the

risk-free asset?