Question

In: Finance

. An investor can design a risky portfolio based on two stocks, A and B. Stock...

. An investor can design a risky portfolio based on two stocks, A and B. Stock A has an

expected return of 18% and a standard deviation of return of 20%. Stock B has an expected

return of 14% and a standard deviation of return of 5%. The correlation coefficient between the

returns of A and B is 0.50. The risk free rate of return is 10%.

What is the Sharpe ratio of the optimal risky portfolio

Solutions

Expert Solution

The optimum risky portfolio means a portfolio having proportion of given stocks with their risks in such a way the risk would be optimum.

So we have to find the proportion of stock A and stock B to be formed in portfolio which would have optimum risk

The calculation done in the attached paper.

While calculating. The stock A proportion came as negative.

So the short selling concept comes here. And hence i assumed the stock A has been involved in short selling and the proceeds received is invested in stock B along with our investment.

jeff jeffy answered 2 hours ago
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