Question

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

Answer #1

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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