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Suppose you are a US investor looking for international diversification opportunities. Your investment advisor offers you an international equity index that expects annual returns of 18%, but the volatility of these returns is 48%. This international index comprises other developed countries as well as some emerging economies. The expected returns, volatility, and correlations are provided below:
Risk-Free Rate
US Equity Index Returns (annual)
International Equity Index Returns (annual)
Expected Returns
3%
8%
18%
Std. Deviation (Volatility)
0%
48%
Correlation US Equity Index
0
1
0.4
Correlation International Equity Index
a. Calculate the expected portfolio return, standard deviation, and Sharpe ratios assuming the weights for the US and International equity indexes are as follows:
US Equity index returns (Weight)
International equity index returns (Weight)
Expected Return
Std. Deviation
Slope of CAL (Sharpe Ratio)
100%
2
10%
90%
3
20%
80%
4
30%
70%
5
40%
60%
6
50%
7
8
9
11
12
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