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Question 5-Portfolio optimization (20 points) The CEO of MIM Inc., I.C. Pearl, has a portfolio 9900R) that she expects to generate returns of 12% with
Question 5-Portfolio optimization (20 points) The CEO of MIM Inc., I.C. Pearl, has a portfolio 9900R) that she expects to generate returns of 12% with a standard deviation of 15%. She has the opportunity to move a fraction of her wealth into a new investment higher that she expects to generate returns of 20% with a standard deviation of 35%. The risk free rate is 5%, and the correlation between the returns in 9900R" and "highver is 0.30. Assume that she can borrow and lend at the risk free rate. Part A (4 points):Eing the Sharpe ratios of the current portfolio and suggested investment. The Sharpe Ratio of the portfolio "good" is The Sharpe Ratio of the portfolio "hishver is Show all your work Part B (5 points):What is the expected return, volatility and Sharpe ratio of the portfolio that is equally split between good and higher (50/50)? The expected return of this portfolio is _%, its volatility is %, and its Sharpe ratio is Show all your work Part C (5 points):What is the optimal allocation between the current portfolio Capod) and this new investment (highven? The optimal weight on the current portfolio is The optimal weight on the new investment is Sharpe Ratio of such a portfolio is Explain your answer. Part D (6 points):CEQ wants to mix this optimal portfolio with risk-free bonds such that the standard deviation of her new investment was 5% How much should she invest in 9900". Thishver, and risk-free bonds? Risk-free bonds have no risk (volatility or correlation with other assets). in risk-free bonds, She would invest Thishvel." in portfolio "Rod and in portfolio Explain your
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