What is the sharpe ratio of john''s portfolio

Reference no: EM1317520

1. You friend John has discovered two-(A)pex and (B)ull and recommended to you. Using historical data, John has estimated the means, volatilities, and correlation of the two stocks as the following:

	Stock A	Stock B
Means	0.15	0.09
St. Dev.	0.32	0.23

Correlation between the two stocks is 0.15. Assume that the risk-free rate is 5.50%.

(a) Without taking this class, John simply split his investment equally in the two stocks. What is the expect return and volatility of his portfolio?

(b) What is the Sharpe ratio of John's portfolio?

(c) One thing you have learned is that the tangency portfolio will give you the maximum Sharpe ratio. Consequently, you have constructed such a portfolio. What are you portfolio weights?

(d) What is your portfolio's Sharpe ratio, and how much can you gain?

2. Continue from the above question.

(a) Since John does not understand the concept of Sharpe ratio, you construct a BEST portfolio that yields the same return as that of John. What are the portfolio weights?

(b) What is the volatility of your portfolio, and how much volatility can you cut relative that of John?

(c) What is your allocation in the three assets-Stock A, Stock B, and Risk-free?

Reference no: EM1317520

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