Question

In: Finance

Assume the following information pertains to three mutual funds FUND Expected Return Standard Deviation of Return...

  1. Assume the following information pertains to three mutual funds

FUND

Expected Return

Standard Deviation of Return

U.S. Bond

6%

12%

U.S. Equity

11%

20%

    U.S. REIT                                                   8%                                       18%

Assume that the correlation between U.S. Bond and U.S. Equity is 10%, the correlation between U.S. Bond and U.S. REIT is 70%, and the correlation between U.S. Equity and U.S. REIT is 60%.

a) What is the standard deviation of this portfolio of 20% Bond, 20% REIT and 60% Equity?

B) Now assume there is a risk-free asset with return = 3% and standard deviation = 0. What is the Sharpe ratio of the

portfolio 20% Bond, 20% REIT and 60% Equity?

Solutions

Expert Solution

a. Standard deviation of portfolio with 3 assets is calculated by using a tricky formula shared below

Solution - IMAGE #1,2,and 3

b. Sharpe Ratio = (Expected portfolio returns - Risk free rate)/Standard deviation of portfolio's excess return

Solution b starts from mid of image #3 till image #4


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