Question
Using the data in the table, answer the questions that follow. Asset Expected Return Standard Deviation Stock Fund S 18% 30% Bond Fund B 9%
Using the data in the table, answer the questions that follow.
Asset | Expected Return | Standard Deviation |
Stock Fund S | 18% | 30% |
Bond Fund B | 9% | 20% |
T-Bills | 5% | -- |
The correlation coefficient between the stock fund S and the bond fund b is 0.15.
C. What are the approximate proportion of stocks and bonds in the optimal risky portfolio? (Hint: this will be the portfolio with the highest Sharpe ratio)
D. If you target return is 12%, what will be the proportions of stocks, bonds and the risk free asset in the complete portfolio? What will be the standard deviation of that portfolio? (Hint: this portfolio has to be on the capital allocation line and will have the same Sharpe ratio as calculated in (C)).
E. Suppose the risk free asset (T-BIlls) is not available. What is are the proportions of stocks and bonds in a portfolio with an expected return of 12%? What is the standard deviation?
F. Compare and comment on the answers in D and E.
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