Question
Problem #41 Calculate the Sharpe ratio of each of the three portfolios in Problem 40 (the initial portfolio with 0% invested in Hannah, the second
Problem #41
Calculate the Sharpe ratio of each of the three portfolios in Problem 40 (the initial portfolio with 0% invested in Hannah, the second portfolio with 40% invested in Hannah, and the third portfolio with 15% invested in Hannah). What portfolio weight in Hannah stock maximizes the Sharpe ratio?
Problem #40
You are currently only invested in the Natasha Fund (aside from risk-free securities). It has an expected return of 14% with a volatility of 20%. Currently, the risk-free rate of interest is 3.8%. Your broker suggests that you add Hannah Corporation to your portfolio. Hannah Corporation has an expected return of 20%, a volatility of 60%, and a correlation of 0 with the Natasha Fund.
A: Is your broker right?
B: You follow your brokers advice and make a substantial investment in Hannah stock so that, considering only your risky investments, 60% is in the Natasha Fund and 40% is in Hannah stock. When you tell your finance professor about your investment, he says that you made a mistake and should reduce your investment in Hannah. Is your finance professor right?
C: You decide to follow your finance professors advice and reduce your exposure to Hannah. Now Hannah represents 15% of your risky portfolio, with the rest in the Natasha fund. Is this the correct amount of Hannah stock to hold?
**please show the complete work out/steps with formulas. No excel sheets.**
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