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Question 1-30 points Consider the following assets whose returns depend on whether the economy is locked down. Return State Probability Asset 1 Asset 2 75%
Question 1-30 points Consider the following assets whose returns depend on whether the economy is locked down. Return State Probability Asset 1 Asset 2 75% -8% 14% Lockdown No Lockdown 25% 12% 4% a. Calculate the expected returns for Assets 1 and 2. (4 points) b. Calculate the variances for Assets 1 and 2. (4 points) C. Calculate the expected return and standard deviation of a portfolio with 20% invested in Asset 1 and 80% invested in Asset 2. (10 points) d. Calculate the Sharpe ratio of the portfolio from part (c) if the risk-free rate is 6%. (4 points) e. Suppose this equally weighted portfolio is on the efficient frontier. Holding the standard deviation of the portfolio constant, can you form a better portfolio comprising only Asset 1 and Asset 2? Explain why or why not. Be BRIEF. No calculations required. (Hint: a picture might be helpful in explaining your answer but is not necessary.) (4 points) f. Again, suppose the equally weighted portfolio is on the efficient frontier. Holding the standard deviation of the portfolio constant, can you form a better portfolio comprising Asset 1, Asset 2, and a risk-free asset? Explain why or why not. Be BRIEF. No calculations required. (Hint: a picture might be helpful in explaining your answer but is not necessary.) (4 points)
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