The average return for Firm A is calculated as 0.05 (5%) with a standard deviation of 0.03.
Question:
The average return for Firm A is calculated as 0.05 (5%) with a standard deviation of 0.03. The
average return for Firm B is calculated as 0.15 (15%) with a standard deviation of 0.06. The
covariance between returns in Firms A and B is equal to -0.0005. The return on the risk-free
asset is 1%.
a) Fill in the table below.
Share in Share in Portfolio Expected Portfolio Standard Sharpe Ratio
Firm A Firm B Return Deviation
100% 0% 5.00% 3.00%
80% 20%
50% 50%
20% 80%
0% 100% 15.00% 6.00%
b.) Plot the portfolio frontier on the graph of standard deviation vs. expected return. Identify
the point that maximizes the Sharpe Ratio, and note that point on your graph.
Understanding Basic Statistics
ISBN: 9781111827021
6th Edition
Authors: Charles Henry Brase, Corrinne Pellillo Brase