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Suppose the risk-free rate of return is 4% and you are given the following five portfolios and their expected return and standard deviations: Portfolio A
Suppose the risk-free rate of return is 4% and you are given the following five portfolios and their expected return and standard deviations: Portfolio A B E(r) 10% 10% 12% 15% 20% Standard Deviation 12% 15% 25% 25% 40% C D E a. Which of the portfolios surely will not be on the efficient frontier? Explain (1-2 sentences) A, B, C, D, E B. Of the remaining portfolios identify the most likely candidate for the optimal risky portfolio? C. What will likely happen to the Sharpe ratio of the optimal risky portfolio if we restrict investment to stocks of socially responsible firms. Explain briefly. D. In recent years, the correlations between all pairs of stocks have increased. What effect does this have on the overall risk of any stock portfolio compared to earlier periods? Explain briefly. E. Explain if it is possible for a stock F to be fairly priced and have an expected return of 8% while having a standard deviation equal to 20%. Suppose the risk-free rate of return is 4% and you are given the following five portfolios and their expected return and standard deviations: Portfolio A B E(r) 10% 10% 12% 15% 20% Standard Deviation 12% 15% 25% 25% 40% C D E a. Which of the portfolios surely will not be on the efficient frontier? Explain (1-2 sentences) A, B, C, D, E B. Of the remaining portfolios identify the most likely candidate for the optimal risky portfolio? C. What will likely happen to the Sharpe ratio of the optimal risky portfolio if we restrict investment to stocks of socially responsible firms. Explain briefly. D. In recent years, the correlations between all pairs of stocks have increased. What effect does this have on the overall risk of any stock portfolio compared to earlier periods? Explain briefly. E. Explain if it is possible for a stock F to be fairly priced and have an expected return of 8% while having a standard deviation equal to 20%
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