Question #5: The Stock Market: Investments:

Suppose youre equally invested (portfolio) in two asset classes A & B. Asset A gives you a return of 8% and has a standard deviation of 20%. Asset B gives you a return of 12% and has a standard deviation of 29%. The correlation between A and B is 0.58. The correlation between the market and A(B) is 0.72(0.65). The market has an average return (standard Deviation) of 10.5% (22%). Government of Canada 5-Year Treasury bonds is 0.85%. [1] What is the expected return and stan- dard deviation of your Portoflio [2] Compute the Sharpe ratio of each asset class and your portfolio [3] using CAPM compute the expected returns of each asset class and your portfolio. What is the key take away from your analysis (overprice/underprice)?