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Problem: Suppose that you currently have $250,000 invested in a portfolio with an expected return of 12% and a volatility of 10%. The efficient (tangent) portfolio has an expected return of 17% and a volatility of 12%. The risk-free rate of interest is 5%.
Required:
Question 1: What is the Sharpe ratio of your current investment? What is the Sharpe ratio of the efficient portfolio? What can you say about your investment based on the ratios?
Question 2: Suppose that you want to maximize your expected return without increasing your risk. How can you achieve this goal?
Question 3: Without increasing your risk beyond the current 10%, what is the maximum expected return you can expect?
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