State of the economy	Probability	Stock S	Bond B
Depression	10%	-10%	-1%
Recession	20%	3%	9%
Normal Economy	30%	12%	7%
Boom	40%	20%	5%

14. as part of his investments course, Tom learned that you can construct an optimal portfolio if you combine a two risky asset portfolio with a risk-free asset. Tom identified a treasury bill with a return of 3% and is now deriving the optimal trading portfolio. What is the weight of bond B in Toms optimal trading portfolio? (note: weights of the optimal portfolio can be calculated using formula 6.10 in our textbook)

1. 59.91%
2. 75.45%
3. 82.46%
4. 20.83%

15. What is the weight of Stock S in Toms optimal trading portfolio?

1. 17.54%
2. 40.09%
3. 24.55%
4. 79.17%

16. What is the expected return of Toms optimal portfolio?

1. 6.75%
2. 7.97%
3. 6.38%
4. 8.34%

17. What is the standard deviation of Toms optimal portfolio?

1. 6.75%
2. 6.00%
3. 3.11%
4. 2.86%

18. What is the Sharpe ratio of Toms optimal trading portfolio?

1. 188.22%
2. 144.93%
3. 154.86%
4. 120.43%

19. Which portfolio has a higher Sharpe ratio, the proposed portfolio? or the optimal portfolio?

1. The optimal portfolio
2. The proposed portfolio

• Now, Ron is ready to start constructing his portfolio using Toms input. Ron will construct his portfolio using two portfolios (1) the risk-free asset, and (2) the optimal trading portfolio identified in the previous question. Ron wants his portfolio to have a required rate of return of 6%.

20. What is the weight of the risk-free asset in Rons portfolio?

1. 40.5%
2. 28.2%
3. 19.9%
4. 24.9%

21. What is the weight of the Stock S in Rons portfolio?

1. 14%
2. 23%
3. 28%
4. 74%

22. What is the weight of the Bond B in Rons portfolio?

1. 43%
2. 66%
3. 29%
4. 40%

WB [E(TB) - ros - [E(rs) - r; OsPes [E(rs) ro + [E(rs) ry]og [E(MB) ry + E(rs) - roses 1-W8 (6.10)