Question
Consider 3 assets in a single-factor APT economy where the market is the single factor. The risk-free rate is 6%. C D Market (M) Average
Consider 3 assets in a single-factor APT economy where the market is the single factor. The risk-free rate is 6%.
C | D | Market (M) | |
Average Return % | 16 | 14.8 | 14 |
Beta | 1.2 | 1.1 | 1 |
Standard Deviation | 42 | 37 | 25 |
You currently hold the market portfolio (M) as the risky asset you use to form a complete portfolio. What weights should you place in portfolios C or D (or both) and M, so as to maximise the Sharpe ratio of your risky portfolio. Your objective is to create a risky portfolio that has superior performance to your current (market) portfolio not create an arbitrage strategy. There are no other investment options available to you. Show your work. When doing your calculations, please round to 6 decimal places. CIRCLE YOUR ANSWERS. (How to answer? If you choose only one portfolio use a weight of 100% and 0% in the other 2 to indicate you are selecting only the one portfolio as your optimal risky portfolio. If for example the optimal were 30% in C, 20% in D and 50% market, then the weights are 30%, 20% and 50% respectively.)
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