In: Finance
A universe of securities includes a risky stock (X), a stock-index fund (M), and T-bills. The data for the universe are:
Expected Return | Standard Deviation | |
X |
20% |
60% |
M | 15% | 25% |
T-Bill | 5% | 0% |
The correlation coefficient between X and M is -0.8
A. Draw the opportunity set of securities X and M
B. Find the optimal risky portfolio (O), its expected return, standard deviation, and Sharpe ratio. Compare with the Sharpe ratio of X and M
C. Find the slope of the CAL generated by T-bills and portfolio O.
D. Suppose an investor places 2/9 (i.e., 22.22%) of the complete portfolio in the risky portfolio O and the remainder in T-bills. Calculate the composition of the complete portfolio, its expected return, SD, and Sharpe ratio.