Question

In: Finance

You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns...

You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns of the assets are 11 percent and 14 percent. The standard deviations of the assets are 35 percent and 43 percent. The correlation between the two assets is .53 and the risk-free rate is 3.8 percent. What is the optimal Sharpe ratio in a portfolio of the two assets? What is the smallest expected loss for this portfolio over the coming year with a probability of 1 percent? ( do not round intermediate calculations. (Round Sharpes ratio answer to 4 decimal places and the s-score value to 3 decimal places when calculating answer. Enter your smallest expected loss as a percent rounded to 2 decimal places).

Solutions

Expert Solution

To find the fraction of wealth to invest in Asset A that will result in the risky portfolio with maximum Sharpe ratio
the following formula to determine the weight of Asset A in risky portfolio should be used
w(*d)= ((E[Rd]-Rf)*Var(Re)-(E[Re]-Rf)*Cov(Re,Rd))/((E[Rd]-Rf)*Var(Re)+(E[Re]-Rf)*Var(Rd)-(E[Rd]+E[Re]-2*Rf)*Cov(Re,Rd)
Where
Asset A E[R(d)]= 11.00%
Asset B E[R(e)]= 14.00%
Asset A Stdev[R(d)]= 35.00%
Asset B Stdev[R(e)]= 43.00%
Var[R(d)]= 0.12250
Var[R(e)]= 0.18490
T bill Rf= 3.80%
Correl Corr(Re,Rd)= 0.53
Covar Cov(Re,Rd)= 0.0798
Asset A Therefore W(*d)= 0.4340
Asset B W(*e)=(1-W(*d))= 0.5660
Expected return of risky portfolio= 12.70%
Risky portfolio std dev (answer )= 34.86%
Sharpe ratio= (Port. Exp. Return-Risk free rate)/(Port. Std. Dev) =(0.127-0.038)/0.3486 =0.2553
Where
Var = std dev^2
Covariance = Correlation* Std dev (r)*Std dev (d)
Expected return of the risky portfolio = E[R(d)]*W(*d)+E[R(e)]*W(*e)
Risky portfolio standard deviation =( w2A*σ2(RA)+w2B*σ2(RB)+2*(wA)*(wB)*Cor(RA,RB)*σ(RA)*σ(RB))^0.5
Smallest expected Loss = Mean
-Normal distribution of probability*std dev
Smallest expected Loss =12.7-Normal distribution of 0.01*34.86
Smallest expected Loss =12.7-2.3263*34.86
Smallest expected Loss =-68.39%

Related Solutions

You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns...
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns of the assets are 10 percent and 27 percent, respectively. The standard deviations of the assets are 17 percent and 31 percent, respectively. The correlation between the two assets is 0.07 and the risk-free rate is 3 percent. What is the optimal Sharpe ratio in a portfolio of the two assets? (A negative value should be indicated by a minus sign. Do not round...
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns...
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns of the assets are 12 percent and 28 percent, respectively. The standard deviations of the assets are 12 percent and 33 percent, respectively. The correlation between the two assets is 0.06 and the risk-free rate is 5 percent. What is the optimal Sharpe ratio in a portfolio of the two assets? Can you show this in excel?
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns...
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns of the assets are 7 percent and 13 percent, respectively. The standard deviations of the assets are 33 percent and 41 percent, respectively. The correlation between the two assets is .49 and the risk-free rate is 5.8 percent. What is the optimal Sharpe ratio in a portfolio of the two assets? What is the smallest expected loss for this portfolio over the coming year...
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns...
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns of the assets are 12 percent and 15 percent. The standard deviations of the assets are 29 percent and 48 percent, respectively. The correlationg between the two assets is .20 and the risk free rate is 4 percent. What is the optimal Sharpe ratio in a portfolio of the two assets? What is the weight of each asset in the portfolio of the two...
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns...
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns of the assets are 12 percent and 16 percent, respectively. The standard deviations of the assets are 29 percent and 37 percent, respectively. The correlation between the two assets is 0.41 and the risk-free rate is 3.4 percent. What is the optimal Sharpe ratio in a portfolio of the two assets? What is the smallest expected loss for this portfolio over the coming year...
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns...
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns of the assets are 12 percent and 16 percent, respectively. The standard deviations of the assets are 36 percent and 44 percent, respectively. The correlation between the two assets is 0.55 and the risk-free rate is 5.1 percent. What is the optimal Sharpe ratio in a portfolio of the two assets? What is the smallest expected loss for this portfolio over the coming year...
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns...
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns of the assets are 9 percent and 14 percent, respectively. The standard deviations of the assets are 25 percent and 33 percent, respectively. The correlation between the two assets is 0.33 and the risk-free rate is 4.2 percent. What is the optimal Sharpe ratio in a portfolio of the two assets? What is the smallest expected loss for this portfolio over the coming year...
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns...
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns of the assets are 8 percent and 13 percent, respectively. The standard deviations of the assets are 30 percent and 38 percent, respectively. The correlation between the two assets is 0.43 and the risk-free rate is 5.6 percent. What is the optimal Sharpe ratio in a portfolio of the two assets? What is the smallest expected loss for this portfolio over the coming year...
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns...
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns of the assets are 11 percent and 16 percent, respectively. The standard deviations of the assets are 28 percent and 36 percent, respectively. The correlation between the two assets is 0.39 and the risk-free rate is 4.4 percent. What is the optimal Sharpe ratio in a portfolio of the two assets? What is the smallest expected loss for this portfolio over the coming year...
You can form a portfolio of two assets, A and B, whose returns have the following...
You can form a portfolio of two assets, A and B, whose returns have the following characteristics:                    Expected Return         Standard Deviation           Correlation A                  8%                           30%                                                                                                      .7 B                  18                                44 a. If you demand an expected return of 15%, what are the portfolio weights? (Do not round intermediate calculations. Round your answers to 3 decimal places.) Stock           Portfolio Weight A B b. What is the portfolio’s standard deviation? (Use decimals, not percents, in your calculations. Do not round intermediate...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT