Question

Suppose you are given the following information about 2 stocks, what is the return standard deviation and sharpe ratio  of a portfolio weighted 55% in stock A and 45% in stock B? W hat is SD of A and B.

• E(RA)=16%E(RA)=16%
• E(RB)=8%E(RB)=8%
• σA=22%σA=22%
• σB=12%σB=12%
• σA,B=−0.003696σA,B=−0.003696
• rf=3%

Answer 1

Return of A = 16%

Return of B =8%

Weighted of A= 55%

Weighted of B = 45%

Portfolio Return = return A * weight A + return B * weight B

= 16%*55* + 8% * 45%

= 8.8%+ 3.6%

= 12.4%

Standard deviation of A = 22%

Standard deviation of B = 12%

Standard deviation of portfolio = std A *weight A + std B * weight B

= 22%* 55%+ 12% * 45*

= 12.1%+ 5.4%

= 17.5%

Sharpe ratio = portfolio return - risk free return / portfolio standard deviation

= (12.4% - 3%) / 17.5%

= 9.4 % /17.5%

= 0.537