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Problem 1. You have access to the follouring three stocks: Asset Stock A Stock B Stock C E.rpected Return Standard Deviation 10% 20% 15% 40%
Problem 1. You have access to the follouring three stocks: Asset Stock A Stock B Stock C E.rpected Return Standard Deviation 10% 20% 15% 40% 20% 80% In addition, you know that stocks A, B, and C are uncorrelated with each other. There is also a riskless asset that yields 5%. You may use Eccel in order to answer the questions below. (a) Compute the weights of the tangency portfolio. (6) Compute the Sharpe ratio of the tangency portfolio. (c) Can you find a portfolio with a higher Sharpe ratio? Why or why not? (d) How does the answer to (c) depend on the CAPM being true? (e) Draw a graph (erpected return vs. volatility) showing all the three assets and the tangency portfolio. Sketch the efficient frontier of risky assets. Draw the capital allocation line. (f) Assume now that the CAPM holds. Compute the betas of the three assets and draw a expected return vs. beta graph. Show the three assets and the tangency portfolio on this graph. Problem 1. You have access to the follouring three stocks: Asset Stock A Stock B Stock C E.rpected Return Standard Deviation 10% 20% 15% 40% 20% 80% In addition, you know that stocks A, B, and C are uncorrelated with each other. There is also a riskless asset that yields 5%. You may use Eccel in order to answer the questions below. (a) Compute the weights of the tangency portfolio. (6) Compute the Sharpe ratio of the tangency portfolio. (c) Can you find a portfolio with a higher Sharpe ratio? Why or why not? (d) How does the answer to (c) depend on the CAPM being true? (e) Draw a graph (erpected return vs. volatility) showing all the three assets and the tangency portfolio. Sketch the efficient frontier of risky assets. Draw the capital allocation line. (f) Assume now that the CAPM holds. Compute the betas of the three assets and draw a expected return vs. beta graph. Show the three assets and the tangency portfolio on this graph
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