Problem 1

Stocks A and B have the following information:

Table 4.1

Stock A

Stock B

Expected Return

10%

12%

Standard Deviation

20%

25%

Correlation (_A,B)

0.2

Risk-free rate

1%

a.Please calculate the Sharpe ratios of these two stocks.

b.An investor buys 1000 shares of Stock A at a price of $4, and 500 shares of Stock B at a price of $12. What's the expected return, standard deviation, and Sharpe ratio of her investment portfolio?

c.If the correlation between Stock A and Stock B is -0.1 instead of 0.2, how will this change the portfolio's standard deviation?