1. You are constructing a portfolio of two assets, Asset A and Asset B. The expe
ID: 2498267 • Letter: 1
Question
1. You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns of the assets are 13 percent and 16 percent, respectively. The standard deviations of the assets are 39 percent and 47 percent, respectively. The correlation between the two assets is 0.61 and the risk-free rate is 5.3 percent. What is the optimal Sharpe ratio in a portfolio of the two assets? What is the smallest expected loss for this portfolio over the coming year with a probability of 1 percent? (Negative amounts should be indicated by a minus sign. Round your Sharpe ratio answer to 4 decimal place & Probabilityanswer to 2 decimal places. Omit the "%" sign in your response.)
Please show working & answers for the Sharpe ratio and Smallest expected loss
1. You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns of the assets are 13 percent and 16 percent, respectively. The standard deviations of the assets are 39 percent and 47 percent, respectively. The correlation between the two assets is 0.61 and the risk-free rate is 5.3 percent. What is the optimal Sharpe ratio in a portfolio of the two assets? What is the smallest expected loss for this portfolio over the coming year with a probability of 1 percent? (Negative amounts should be indicated by a minus sign. Round your Sharpe ratio answer to 4 decimal place & Probabilityanswer to 2 decimal places. Omit the "%" sign in your response.)
Explanation / Answer
Sharpe ratio = (rx - Rf) / Std(x)
The sharpe ratio for portfolio A = 13 - 5.3 / 39 = .197
The sharpe ratio for portfolio B = 16 - 5.3 / 47 = .228
Based on above calculation Asset B was able to generate a higher return on a risk adjusted basis
optimal Sharpe ratio in a portfolio = .228
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