You are interested in forming a portfolio with Stock S and Bond B. Stock S has an expected return of 14% and a standard deviation of returns of 30%. Bond B has an expected return of 8% and a standard deviation of returns of 15%. The correlation coefficient of the returns of S and B is 0.22. The risk-free rate of return is 5%. Using increments of 1 percentage point, fill in the template posted and plot both efficient frontiers (with vs. without the risk-free asset.) When plotting the line for the frontier with the risk-free asset, use a range from 0 to 30 for the X values. Please do not forget the important reminders below. 1. The weight in the bond (Wb) for the minimum-variance portfolio needs to be inserted numerically within the Wb column. 2. The weight in the bond (Wb) for the maximum-Sharpe-Ratio portfolio does not need to be inserted numerically in the Wb column, but you can do so if you would like.

G K L o A B D E F E(Rs) E(Rb) SDstock SDbond CorrBS T-bill rate INSERT THE GIVEN VALUES HERE AS REGULAR NUMBERS, NOT DECIMALS. H wb for min. var. portfolio: M N wb for optimal Sharpe Ratio: 1 2 numerator = denominator = Answer = PROGRAM. PROGRAM PROGRAM. P R S T Term 1 Term 2 Term 3 Total numerator: PROGRAM. PROGRAM. PROGRAM. denominator: PROGRAM. PROGRAM. PROGRAM. PROGRAM. . Answer = PROGRAM 3 4 5 6 7 Line goes through two points: (0,r) and xy coordinates of We know that (0,rf) = optimal risky (0, T-bill rate). Now we Now construct EF portfolio (i.e., need to find portfolio when risk-free highest Sharpe with highest Sharpe asset exists. ratio). ratio. Sharpe Ratio 8 Find points on line. This is our slope. Max Sharpe Ratio PROGRAM (wssds)^2 (wbsdb)^2 2wssdswbsdbpbs Var(rp) SD(rp) 9 WS wb E(rp) 10 ADD ROWS AS NEEDED. 11 ADD ROWS AS NEEDED. 12 ADD ROWS AS NEEDED. y=mx+b O PROGRAM. 1 PROGRAM. 2 PROGRAM. INSERT NUMBERS PROGRAM IN COLUMN IN COLUMN AS NEEDED. AS NEEDED. 13 ADD ROWS AS NEEDED. 14 ADD ROWS AS NEEDED. . 15 ADD ROWS AS NEEDED. 16 17 18 19 20 21 22 23 24 G K L o A B D E F E(Rs) E(Rb) SDstock SDbond CorrBS T-bill rate INSERT THE GIVEN VALUES HERE AS REGULAR NUMBERS, NOT DECIMALS. H wb for min. var. portfolio: M N wb for optimal Sharpe Ratio: 1 2 numerator = denominator = Answer = PROGRAM. PROGRAM PROGRAM. P R S T Term 1 Term 2 Term 3 Total numerator: PROGRAM. PROGRAM. PROGRAM. denominator: PROGRAM. PROGRAM. PROGRAM. PROGRAM. . Answer = PROGRAM 3 4 5 6 7 Line goes through two points: (0,r) and xy coordinates of We know that (0,rf) = optimal risky (0, T-bill rate). Now we Now construct EF portfolio (i.e., need to find portfolio when risk-free highest Sharpe with highest Sharpe asset exists. ratio). ratio. Sharpe Ratio 8 Find points on line. This is our slope. Max Sharpe Ratio PROGRAM (wssds)^2 (wbsdb)^2 2wssdswbsdbpbs Var(rp) SD(rp) 9 WS wb E(rp) 10 ADD ROWS AS NEEDED. 11 ADD ROWS AS NEEDED. 12 ADD ROWS AS NEEDED. y=mx+b O PROGRAM. 1 PROGRAM. 2 PROGRAM. INSERT NUMBERS PROGRAM IN COLUMN IN COLUMN AS NEEDED. AS NEEDED. 13 ADD ROWS AS NEEDED. 14 ADD ROWS AS NEEDED. . 15 ADD ROWS AS NEEDED. 16 17 18 19 20 21 22 23 24