Question

# ou are constructing a portfolio of two assets. Asset A has an expected return of 12...

ou are constructing a portfolio of two assets. Asset A has an expected return of 12 percent and a standard deviation of 24 percent. Asset B has an expected return of 18 percent and a standard deviation of 54 percent. The correlation between the two assets is 0.20 and the risk-free rate is 4 percent. What is the weight of each asset in the portfolio of the two assets that has the largest possible Sharpe ratio? (Do not round intermediate calculations. Enter your weights as a percent rounded to 2 decimal places. Round the Sharpe ratio to 4 decimal places.)

Weight of Asset A:

Weight of Asset B:

Sharpe ratio

 To find the fraction of wealth to invest in Asset A that will result in the risky portfolio with maximum Sharpe ratio the following formula to determine the weight of Asset A in risky portfolio should be used

 Where Asset A E[R(d)]= 12.00% Asset B E[R(e)]= 18.00% Asset A Stdev[R(d)]= 24.00% Asset B Stdev[R(e)]= 54.00% Var[R(d)]= 5.76% Var[R(e)]= 29.2% T bill Rf= 4.00% Correl Corr(Re,Rd)= 0.2 Covar Cov(Re,Rd)= 0.0259 Asset A Therefore W(*d)= 0.7668 Asset B W(*e)=(1-W(*d))= 0.2332 Expected return of risky portfolio= 13.40% Risky portfolio std dev= 24.29%

sharpe ratio = (expected return-risk free rate)/std dev = (13.4-4)/24.29=0.3869

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