You are constructing a portfolio of two assets, Asset A and Asset B. The expecte

Question

You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns of the assets are 13 percent and 16 percent, respectively. The standard deviations of the assets are 26 percent and 34 percent, respectively. The correlation between the two assets is 0.35 and the risk-free rate is 3.2 percent. What is the optimal Sharpe ratio in a portfolio of the two assets? What is the smallest expected loss for this portfolio over the coming year with a probability of 5 percent? (Negative amounts should be indicated by a minus sign. Round your Sharpe ratio answer to 4 decimal place & Probability answer to 2 decimal places. Omit the "%" sign in your response.)

Incorrect Answers previously provided (0.6905, -11.96%) and (45.25%, -10.66%)

Explanation / Answer

Answer Assume Investment in both assets are equal. i.e. 50% Each Expected Return From Portfolio = (0.50*13%)+(0.50*16%) = 14.50% Portfolio Varaiance of Prtfolio = [(0.50)2(0.26)2+(0.50)2(0.34)2]+[2(0.50)(0.50)(0.26)(0.34)(0.35)] = 0.06127 Standrard deviation of Portfolio = Sqrt (0.06127) 0.247528 =24.75% Expected Loss = 0.145-0.247528 Expected Loss @ 5% will be -0.10 Answer Sharpen Ratio(max) Sharpen Ratio(max) = E(Rp)-(Rf)/Std deviatio of portfolio Sharpen ratio (max) = ( 0.145-0.032)/0.247528 Sharpen Ratio (max) = 0.4565

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