1. You are constructing a portfolio of two assets, Asset A and Asset B. The expe
ID: 2749033 • 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.)
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
The Sharpe Ratio quantifies the risk efficiency of an investment. It’s equal to the effective return (the actual return minus the risk-free rate) of an investment divided by its standard deviation
Sharpe Ratio =Effective return/Standard devaition of portfolio
Effective return
Average actual return from assts = (13+16)/2
=14.5%
Effective return = 14.5%-5.3% = 9.2%
Standard devaition of portfolio =Square root of {(.5*39)^2+(.5*47)^2+2*.5*.5*39*47*.61
Standard devaition of portfolio =38.62
Sharpe Ratio = 9.2/38.62
=.24
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