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HW 7 16. Madison would like to form a portfolio between Microsoft (Ticker: MSFT) and a bond index fund. The following table shows the performance

HW 7 16. Madison would like to form a portfolio between Microsoft (Ticker: MSFT) and a bond index fund. The following table shows the performance of the two assets in each state of the economy.

Prob. MSFT(%) Bond(%)

Recession 0.1 -40 12

Normal 0.7 20 6

Boom 0.2 50 -2

Suppose the standard deviation of Microsoft is 23.24% and the standard deviation of the bond fund is 3.92%. Madison will form a portfolio which invests 40% into Microsoft and 60% into the bond fund.What is the standard deviation and sharpe ratio of the portfolio if risk-free rate is 4%?

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