Topic: Sharpe ratio and optimal portfolios 3) Snookie is a marketer for Jersey Capital, a New Jersey based hedge fund. Snookie states that her fund has an expected return of 6% and a standard deviation of 3%. She argues that this 2-to-1 ratio is excellent, especially since the market expected return is 10% and the market standard deviation is 20%, for a ratio of only 0.5-to-1. Assume the risk free rate is 5%. Having taken FINE 441, you are not impressed with her 2-to-1 ratio of total return-to-risk. a) To prove your point that total return-to-risk is not a good measure of performance, construct a portfolio that has a total return-to-risk ratio of 5 using only the market portfolio and the risk free asset. b) What is the Sharpe ratio of Jersey Capital? c) What is the Sharpe ratio of the market? d) Construct a portfolio that has a standard deviation equal to that of Jersey Capital using only the market portfolio and the risk free asset. What are the expected return and Sharpe ratio of this portfolio. e) Construct a portfolio that has an expected return equal to that of Jersey Capital using only the market portfolio and the risk free asset. What are the standard deviation and Sharpe ratio of this portfolio. f) On a graph of expected return vs. standard deviation, plot the following 4 portfolios and their associated Capital Allocation Lines (CAL): Jersey Capital, market, your answers to d) and e)