New Portfolios A B

Portfolio Returns 0.10 0.06

Standard Deviation 0.18 0.08

Variance 0.0324 0.0064

Beta 1.20 0.80

Market Return 0.08 0.08

Standard Deviation 0.15 0.15 Risk Free Return 0.03 0.03

CAPM 0.09 0.07

One of these two new portfolios should be added to an existing portfolio. The existing portfolio has an expected return of 8% and a beta of 1.0 currently. The investment in either of these new portfolios will equal the existing portfolio. So, the weight of the existing portfolio is 50% and the new added portfolio will be 50%. The portfolio manager thinks markets are going to be better in the future and is okay with a tactical move to change the average Beta of the portfolio. The portfolio risk tolerance is A = 3.

1. Which is the most efficient portfolio using the Sharpe ratio?
2. Which new portfolio has the best Alpha?
3. What is the Utility measure of each portfolio?
4. Which portfolio would you add to the existing portfolio? Why?
5. What is the Combined portfolio return?
6. What is the Beta of the Combined portfolio?
7. What is a fiduciary obligation or caution you would advise?

Answers:

	Sharpe	Alpha	(c) Utility Measure
	A B	A B	A B
d	Add which portfolio - Why:
e	Return Combined portfolio:
f	Combined portfolio Beta:
g	Caution: