Question
You have $10,000 available to invest in two stocks, and their expected returns in the different states of the economy are displayed below: State Probability
You have $10,000 available to invest in two stocks, and their expected returns in the different states of the economy are displayed below:
| State | Probability | A | B |
| Boom | 0.05 | 25.00% | 10.00% |
| Normal | 0.5 | 11.00% | 9.00% |
| Recession | 0.45 | -15.00% | 8.00% |
You are looking to invest $5,500 in A and the rest in B. The risk-free rate is 3.00%.
(a) What is the Sharpe ratio of A, B and the resulting portfolio? (10 marks)
(b) You decided to borrow $3,000 at the risk-free rate to invest in the portfolio, what is the eventual expected return and standard deviation of this new portfolio? (3 marks)
(c) How will you change the allocation of A and B to achieve the highest Sharpe ratio? (2 marks)
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Derivatives And Internal Models
Authors: Hans Peter Deutsch, Mark W. Beinker
5th Edition
3030229017, 9783030229016
