Please show all work. Thanks! An optimal risky portfolio has been developed with

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Please show all work. Thanks!

An optimal risky portfolio has been developed with investments in stocks and bonds This optimal portfolio has 24% invested in bonds and the remainder invested in stocks The optimal portfolio mean return is 12.05% and its standard deviation is 18.45% The t-bill rate is 4.75%; what is the mean of the complete portfolio if 33% is invested in the optimal portfolio and theremainder is invested in T-bills? a What is the resulting allocation to stocks and bonds in this complete portfolio? b Calculate the Sharpe ratio for the complete portfolio lease showall computations Il a Express Excess return on a security in terms of Beta firm specificrisk alpha Ascatter diagram for D Corp shows observations of annual returns over a ten year period The Security characteristicLine [regression line] for D Corp shows the following Beta Alpha 1.25 3.25% If the market excess return is 17%, what is the expected return for D Corp? C Observation J shows an actual return of 25.25% when the market excess return is 17%. Comment on this finding RISK RETURN TRADEOFF WITH TWO RISKY ASSETS PORTFOLIOS EIRb] Sdevn b EIRS Sdevns Corr coeff 5.50% 7.85% b-bond fund s stock fund p portfolio with two risky assets 19.25% 0.22 Investor considering 45% stocks and 55% bonds Calculate b Portfolio Sdevn- assign 2

Explanation / Answer

The optimal portfolio has 24% invested in bonds and remaining in stock. Optimal mean return is 12.05% and its S.D is 18.45%.

If 33% is invested in the optimal portfolio and remainder to T-bill then the mean will be

T-bill rate 4.75%

And investment in T-bill will be (100%-33%) =67%

Mean=67%*4.75%+33%*12.05% = 7.15%

Allocation in stock = 0.76*0.33= 25.08% and remainder (100%-25.08%) = 74.92% will be in bond.

Optimal portfolio has 76% holding in stock to new portfolio containing 33% of that portfolio so it should be 0.76*0.33.

Sharpe ratio = (Mean portfolio return Risk-free rate)/Standard deviation of portfolio return

Risk free rate should be considered as T-bill rate that is 4.75%.

= (7.15%-4.75%)/18.45% = 0.13

Q2.

Beta-1.25 Alpha-3.25%

Alpha= Actual return- Expected return

3.25%=25.25%-Expected Return, Expected Return= 25.25%-3.25%=22%

Q3

E[Rb]=5.5%, E[Rs]=11%

Sdevn b=7.85% and Sdevn s= 19.25%

Corr-Cof-0.22

45% in stock and 55% bond

Portfolio Return = 0.45*0.11+0.55*0.055 = 7.98%

Portfolio Sdevn P= w^2A*^2(RA) + w^2B*^2(RB) + 2*(wA)*(wB)*Cov(RA, RB)

=Sq.rt of (0.45^2*0.1925^4+0.55^2*0.0785^4+2*0.45*0.55*0.22) = 0.33 =33%

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