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Discuss managing an equal-weighted portfolio of stocks

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Reference no: EM131790641

Task 1:

You are managing an equal-weighted portfolio of stocks on behalf of your company's treasury. Assume thatstock A and stock B are two risky assets. C is a risk-free asset.

The details of these stocks are below:

Stock A

Stock B

C (Risk-free asset r f) Average return

7.00%

15.00%

2.00%

Variance of return

0.0064

0.0196

Sigma of return

8.00%

14.00%

Covariance of returns

0.0011

Required

Using the information in the above stated table calculate the following:

a. Expected

market portfolio return, E(RM)

W A X E(R A) + WB X E(R B) =0.5 x 0.07 + 0.5 x 0.15 = 0.11 = 11%

b. Market excess return = Expected Retun - Risk Free =11% - 2% = 9%

c. The Sharpe ratio = Market Excess Return / Portfolio Std Dev

Portfolio Std deviation = (0.52 X 0.07 + 0.5 2 X 0.15 + 2 (0.5) (0.5) 0.0011) 0.5 = 0.305040981 = 31%

Sharpe Ratio = 9% / 31% = 29.5%

Explain what information the Capital Market Line and the Security Market Line give and why they are considered useful tools in portfolio management (250 words max)

Reference no: EM131790641

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