Question
The table below provides information on two individual risky assets A and B, the market portfolio M and the risk-free asset F. Assume that the
The table below provides information on two individual risky assets A and B, the market portfolio M and the risk-free asset F. Assume that the CAPM holds
Asset | Expected Return | Standard deviation |
A | 20% | 60% |
B | 10% | 20% |
M | 14% | 8% |
F | 4% | 0% |
(A) Suppose you wish to construct an equally weighted portfolio with only asset A and asset B, Assuming the correlation between A and B is 0.5, calculate the following
(i) Expected return of this portfolio. (2 marks)
(ii) Standard deviation of this portfolio. (2 marks)
(iii) Systematic risk of A, B and this portfolio (6 marks)
(iv) Sharpe ratio of this portfolio (suppose the expected return is identical to the average of historic returns) (3 marks)
(v) Treynor ratio of this portfolio (suppose the expected return is identical to the average of historic returns) (3 marks)
B. If you wish to construct a portfolio with expected return of 12% and are considering four ways this might be done:
- Invest in A and B
- Invest in A and F
- Invest in M and F
- Invest in B and M
Without doing any calculations, explain which option will be preferred.
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