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2. You are going to form a portfolio out of two assets: a risk-free asset (the current 3-month Treasury bill return) and a risky asset (the Vanguard Total Stock Market ETF, Ticker: VTI). The main details are given below: Average Return Standard Deviation Total Stock Market ETF 7.69% 15.8% 3 Month Treasury Bill 0.67% 0% A. Graph in terms of expected returns and standard deviation the possible set of portfolios if you restrict yourself to these two assets. B. What would be the expected return and standard deviation of the portfolio if you hold 80% in the risky asset and 20% in the risk-free asset? C. How much of your portfolio would you need to invest in the risky asset to have a portfolio with a standard deviation of 5%? (Hint: solve for the weight in the risky asset, w, using the fact that the weight in the risk-free asset is (1-w).) D. How much of your portfolio would you need to invest in the risky asset to have a portfolio with an expected return of 10%? Problems: 1. Considering the following quarterly prices and dividends for two share classes for Bank of America Corporation: Common Shares (BAC) Preferred Shares (BAC-D) Qtr. End Date Price Dividend Price Dividend Mar 2017 23.59 .075 25.22 0.39 Dec 2016 23.09 .075 24.58 0.39 Sep 2016 15.65 .075 25.74 0.39 Jun 2016 14.49 .05 25.81 0.39 Mar 2016 13.52 .05 25.40 0.39 Dec 2015 16.83 .05 25.49 0.39 A. Calculate the quarterly holding period returns for each share class from January 2016 through March 2017. Hint: Assume the beginning of quarter price is the price from the last quarter (so the beginning share price for the quarter ending March 2016 is from December 2015). B. Calculate the arithmetic average return for both share classes. C. Calculate the average quarterly holding period return (geometric average) for both share classes. D. Calculate the total (cumulative) 5 quarter holding period return for both share classes. Which share class offered the better return? E. Calculate the variance and standard deviation of the quarterly holding period return for each share class. If the quarterly risk-ee return over this period was 0.05%, what is the Sharpe Ratio (reward-to-risk ratio) for each share class. Which one has the higher Sharpe Ratio? (Hint: use the average returns from part B for the Sharpe Ratio calculations. You may want to do this in Excel to save time.) F. OPTIONAL PART: Calculate the covariance and correlation between the two share classes over this period. Would a portfolio composed of these two assets have a lower standard deviation than the weighted average of their separate standard deviations? (You may want to do this in Excel to save time.)