What is the optimal percentage of the portfolio to invest

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Consider two assets, one consisting of a broad swath of large U.S. stocks (Asset A), and the other of a basket of blockchain-related stocks (Asset B). The correlation between the two assets is 0.45. The risk-free rate is 3.5%.

Below is data on each asset's risk/return profile:

ASSET A : RETURN 12% . STANDARD DEVIATION 0.25
ASSET B : RETURN 20% . STANDARD DEVIATION 0.60

Problem 1: A prospective investor who already holds A asks you how much of their portfolio they should invest in B to optimize their portfolio's risk/return profile. Using the Sharpe ratio, what is the optimal percentage of the portfolio to invest in B (assuming you cannot short A or B)?

Option 1: 19%
Option 2: 32%
Option 3: 60%
Option 4: 12%

Reference no: EM132968819

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