Question

********* Section C only. Please show your excel formula**************

In addition to risk-free securities, you are currently invested in the Tanglewood Fund, a broad-based fund of stocks and other securities with an expected return of 11% and a volatility of 24%. Currently, the risk-free rate of interest is 4%. Your broker suggests that you add a venture capital fund to your current portfolio. The venture capital fund has an expected return of 22%, a volatility of 80%, and a correlation of 0.2 with the Tanglewood Fund. Assume you follow your broker's advice and put 50% of your money in the venture fund:

a. What is the Sharpe ratio of the Tanglewood Fund? (The Sharpe ratio of the Tanglewood Fund is 0.29. )

b. What is the Sharpe ratio of your new portfolio? (The Sharpe ratio of your new portfolio is 0.28.)

c. What is the optimal Sharpe ratio you can obtain by investing in the venture fund? (Hint: Use Excel and round your answer to two decimal places.)

Answer 1

a)sharpe ratio=(expected return-risk free)/standard deviaiton of stock
=(11%-4%)/24%
=0.29
b) Now we invest 50% in venture fund and 50% in the tanglewood fund
expected return of portfolio=16.50%
std=44%
sharpe ratio=(16.5%-4%)/44%
=0.28
c)optimal share ratio occurs at below
expected return of portfolio=12.85%
std=26.22
sharpe ratio=(12.85%-4%)/26.22%
=0.34