Question
You consider investing $1000 in a complete portfolio, the complete portfolio is composed of T-bills that pay 5% and a risky portfolio, P, constructed with
You consider investing $1000 in a complete portfolio, the complete portfolio is composed of T-bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 40% and 60% respectively. X has an expected rate of return of 0.12 and variance of 0.0081, and Y has an expected return of 0.09 and a variance of 0.0016. The coefficient of correlation, rho, between X and Y is 0.45. If you decide to hold a complete portfolio that has an expected outcome of $1,180.
a. What will be the dollar values of your positions in X, Y, and treasury bills respectively?
b. What is the risk for risky portfolio P?
c. What is the Sharpe Ratio for the risky portfolio P?
d. What is the risk for this complete portfolio C? (Hint: Risk in comp. port. C is the product of Y (the weight in P) and the risk of P.
e. What is the Sharpe Ratio (SR) for this complete portfolio C?
Note: SR is the price per unit of risk
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