Reference no: EM133123826
Consider the following capital market: a risk-free asset yielding 2.25% per year and a mutual fund consisting of 70% stocks and 30% bonds. The expected return on stocks is 14.50% per year and the expected return on bonds is 3.50% per year. The standard deviation of stock returns is 35.00% and the standard deviation of bond returns 15.00%. The stock, bond and risk-free returns are all uncorrelated. What is the expected return on the mutual fund? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.
Using the data from problem 1, what is the standard deviation of returns for the mutual fund? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.
Using the data from problem 1, now, assume the correlation between stock and bond returns is 0.25 and the correlations between stock and risk-free returns and between the bond and risk-free returns are 0 (by construction, correlations with the risk-free asset are always zero). What is the standard deviation of returns for the mutual fund with this new higher correlation? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.
4. Using the data from problem 3, what is the standard deviation of the minimum variance portfolio formed from this stock and bond portfolio? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.
5. Using the data from problem 3 where the risk-free rate is 2.25%, what is the stock weight of the tangency portfolio formed by creating the optimal risky portfolio from this stock and bond portfolio? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.
6. Using the data from problem 5, what is the Sharpe Ratio of the tangency portfolio formed by creating the optimal risky portfolio from this stock and bond portfolio? Note that the Sharpe Ratio is shown as a number rather than a percentage. Enter your answer rounded to two decimal places. For example, if your answer is 123.45% or 1.2345 then enter as 1.23 in the answer box.
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