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