In our discussion of efficient portfolios, we saw the we can directly find the optimal portfolio of risky assets (at least for an investor whose entire preference is defined by mean and variance) by maximizing the so-called Sharpe ratio. Explain why this optimization procedure works that is, why is a maximum Sharpe ratio considered optimal. (Hints: Think about what a combination of the risk-free asset and any risky portfolio selected from the efficient frontier would look like. In other words, how would the set of combinations of the risky and the risk-free plot visually in our risk-return space? Consider the fact that a risk-free asset, of course, has zero variance and, thus, has zero-covariance with any other asset or portfolio.)

Discuss about that with approximately 400 words.