Calculate the sharpe ratio for the different weight pairs

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Reference no: EM133269640

Question - Assume that the two stocks Stock A and Stock B are the only assets available to investors. Suppose further that there is a bank that offers an interest rate of 2.55% on invested capital (risk-free) and a lending rate of 6.55%. Stock A has an expected return of 19% and a standard deviation of 40.29% and Stock B has an expected return of 11% and a standard deviation of 21.77%. Since the lending and deposit rates are different, the CML will no longer take the form of a straight line. Instead, the CML consists of three different parts. The first part is a straight line extending from the deposit rate point and tangent to the portfolio front. The second part picks up where the first part ends and extends along the portfolio front to the point where a straight line extending from the lending rate is tangent to that portfolio front. The third part is a straight line and which takes up where the second part ends and has the same slope as a straight line extending from the lending rate and tangent to the portfolio front. The tangent portfolio when you invest part of your capital in the bank has an expected return of 14.09% with a standard deviation of 25.07%. The tangent portfolio when you mortgage your portfolio has an expected return of 16.53% with a standard deviation of 31.75%. Calculate the expected return for an optimal portfolio that has a standard deviation of 43.33%.

The market portfolio is the portfolio with the highest Sharpe ratio. Do the following

Step 1: Calculate the Sharpe ratio for the different weight pairs.

Step 2: Select the weight pair with the highest Sharpe ratio.

Reference no: EM133269640

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