Question
Assume two risky assets A and B with expected returns and standard deviations given as E(RA) = 10%, A = 25%, E(RB) = 15% and
Assume two risky assets A and B with expected returns and standard deviations given as E(RA) = 10%, A = 25%, E(RB) = 15% and B = 35%. The risk-free rate is 4%. i. If A and B are independent of each other, calculate the expected return and standard deviation of a combination portfolio consisting of 25% in the risk-free asset, 25% in asset A with the remainder 50% in asset B. Provide your answer to two decimal places.
ii. Calculate the Sharpe ratio of A, B and the combination portfolio from part (i). If you are a mean-variance risk-averse investor, which of the three assets (A, B or the combination portfolio) will you choose? Please explain your answer in detail.
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