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Q7-Consider the following combination of expected return and risk for various portfolios (named A-H) on the risk-return diagram. Assume a risk-free rate of 12% where
Q7-Consider the following combination of expected return and risk for various portfolios (named A-H) on the risk-return diagram. Assume a risk-free rate of 12% where one may borrow or lend at this rate. Expected Return (%) Risk (%) A 10 23 B 12.5 21 C D E F G H 15 16 17 18 18 20 25 29 29 32 35 45 Sharpe Ratio 1. Which of the above portfolios has the highest Sharpe ratio? (Must express in percentage) (5pts.) To calculate the Sharpe ratio, subtract the risk-free rate of 12% from each portfolio's return and divide that by the standard deviation. The Portfolio F has the highest Sharpe ratio: Excess return Sharpe ratio = - - = .1875 = 18.75% standard deviation 2. Suppose an investor can lend/borrow at the risk-free rate. Assume the investor can tolerate at most 25% risk in any constructed portfolio. What is the best strategy for the investor? Must show work.(20 pts.) Hint: You may want to treat this a problem in efficient frontier in the presence of a risk-free asset
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