8. Again, you are currently investing in 1,000 individual local stocks and a ris

Question

8. Again, you are currently investing in 1,000 individual local stocks and a risk-free bond whose capital allocation line (opportunity set) has a slope of 0.5. Now, you have found that there is a company in Thailand whose Sharpe ratio is equal to 0.4. Can you ignore this stock? Or, in some cases, can you still be better off by adding this stock to your current portfolio? 9. Suppose all investors have the same estimates for the expected returns and standard deviations of any individual securities. But those investors may have different risk-aversion levels. Suppose investor A has decided to invest $10,000 in Coca-Cola, $5,000 in Uber, and $20,000 in the Treasury bills. The standard deviation of a return for Uber is higher than that of Coca-Cola. Now imagine investor B who is more risk averse than investor A. Investor B has $2,000 invested in Coca-Cola (a) In this situation, can you guess how much investor B has invested in Uber? You only need to say whether it is smaller than, equal to, or larger than $1,000 (b) Also, can you infer how much investor B has invested in the Treasury bills? Again, just answer whether it should be smaller than, equal to, or larger than $4,000

Explanation / Answer

8) No. We cannot ignore the stock as the ratio is postive. Yes, one can still be better off by adding the stock to the portfolio.

Since B is a risk averse investor;

9 (a) He will invest amount equal to USD 1000 in Uber.

9 (b) He will invest amount higher than USD 4000 in T-Bills.

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