Hello tutors, I want to discuss with you about this question.

1.You are hired as an investment manager and are asked to construct a portfolio. You decide to put half of the money under your management in a

stock portfolio that has an expected annual return of 14% and a standard deviation of 24%. You put the rest of the money in a risky bond

portfolio that has an expected annual return of 6% and a standard deviation of 12%. The stock and bond portfolios have a correlation of .55.

a.What is the expected return and the standard deviation of your resulting portfolio ?

b.You then decide to make some adjustments. You reduce the weight of the stock portfolio down to 40%, and put that 10% in a risk-free asset.

The annual risk-free rate of return is 3%. What is the expected annual return and standard deviation of your portfolio now ?

c.What is the Sharpe ratio of your portfolio in (a) ? What is the Sharpe ratio of

your portfolio in (b) ? Which portfolio is better ?

d.If you hold your portfolio for 3 years, what would the Sharpe ratios be ?

2.You are a _nancial advisor. Your client asks for your help in choosing between two stocks, A and B. Stock A has an expected return of 12% and a

CAPM beta of 1.2. Stock B has an expected return of 16% and a CAPM beta of 2. The expected market rate of return is 9% and the standard

deviation of the market is 21%. The risk-free rate is 2%.

a.Which stock would you recommend buying? Why ?

b.Later, your client _nds another stock, C, that has a correlation with the market of .45 and the standard deviation of 35%. What is stock C's CAPM

beta ? What is the expected return of stock C implied by CAPM ?

c.In the end, your client decides to invest $50,000 in buying all three stocks. She puts $20,000 in stock A, $12,000 in stock B, and the rest in

stock C. What is her portfolio beta ?