Suppose you estimated the following data for funds GMO and OMG. The correlation coefficient

between them is 0.35. The risk-free rate is 5%.

E(R)

GMO

19%

29%

OMG

8%

15%

a.) Mango fund invests 45% in GMO and the remaining in OMG. What are the E(R), , and Sharpe

ratio of Mango?

b.) Among all possible portfolios formed from GMO and OMG funds, Mingo has the lowest variance.

What are the E(R), , and Sharpe ratio of Mingo?

c.) Fund Optigo chooses to invest in GMO and OMG with the highest possible reward-to-volatility

ratio. What are the E(R), , and Sharpe ratio of Optigo?

d.) Suppose your client Linda wants to allocate her investment between the Optigo fund and the riskfree assets. She hopes to limit her risk to 10%. How do you allocate Lindas money to T-bills, OMG,

and GMO? What is her Sharpe ratio? [Hint: Capital allocation problem.]