Question
Question 2: Suppose John and Kim are thinking of combining their investment portfolios. Both portfolios have the same two assets (A and B) with the
Question 2: Suppose John and Kim are thinking of combining their investment portfolios. Both portfolios have the same two assets (A and B) with the following covariance matrix (the first row and the first column are for asset A).
0.09 | 0.03 |
0.03 | 0.04 |
The expected return of asset A is 10% and the expected return of asset B is 7%. Suppose the riskless asset has an expected return of 3.0%. John has 65% invested in asset A, while Kim has 75% invested in asset A. The value of Johns portfolio is $75,000 and the value of Kims portfolio is $95,000.
What are the values of investments in the two assets after combining the portfolios? (3)
What are the weights of the two assets in the portfolio after combining the portfolios? (3)
What are the expected return and the standard deviation of the combined portfolio? (2+4)
What is the correlation between assets A and B? (2)
What is the Sharpe Ratio of the combined portfolio? (2)
If the goal is to earn an annual return of 8%, what should be the allocations to the combined portoflio and the risk-free asset? (5)
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