B13 Boeing BA Kellogg Risk-free 2 Average 3 Variance 4 Sigma 10.75% 0.1152 33.94

Question

B13 Boeing BA Kellogg Risk-free 2 Average 3 Variance 4 Sigma 10.75% 0.1152 33.94% 0.0043 6.28% 0.0166 12.87% 7Part A. Consider a portfolio consisting of BA and K only. Given the investment allocation below, calculate portfolio's Sharpe ratio and other statistics 8 Percentage in BA 9 Percentage in K 10 Expected portfolio return, E(r) 11 Portfolio standard deviation, ap 12 Sharpe Ratio 13 60.00% 40.00% 8.96% 4.21% 1.6544 0.06961 14 Part B. Now consider adding the risk-free asset to the portfolio in Part A. Given the investment allocation below, calculate portfolio's expected return and standard deviation 15 Percentage in portfolio (BA and K) 16 Percentage in risk-free asset I Expected porttolio return 18 Portfolio standard deviation 19 20 Part B. Identify the market portfolio, the intercept and the slope of the capital market line (CML) equation 21 Percentage of BA in the market portfolico 22 Percentage of K in the market portfolio 23 CML intercept 24 CML slope 25 30% Part C. If you invest 20% in the risk-free asset a rest in the market portfolio, what are your 26 portfolio expected return and standard deviation? 27 Percentage of investment in the risk-free asset 28 Percentage of investment in the market portfolico 29 Expected portfolio return, Er) 30 Portfolio standard deviation, ap

Explanation / Answer

Part-B

Expected Portfolio Return =0.70x8.96 + 0.30x2.00 =6.272+0.60 =6.872%

Standard Deviation = {0.70x(8.96 - 6.872)2 + 0.30x(2.0-6.872)2}1/2 ={3.0518 + 7.1209 }1/2 =3.19%

Part-B

Percentage of BA in Market Portfolio =0.60x0.70 =42%

Percentage of K in Market Portfolio =0.40x0.70 =28%

CML Intercept = Rf = 2%

CML Slope = (E - Rf)/SD = (8.272 -2.00)/3.19 = 1.97

Part-C

Percentage of investment in Risk-Free Asset =20%

Percentage of investment in Market Portfolio =80%

Expected Portfolio Return, E(Rp) = 0.20x2.00 + 0.80x8.96 =0.40 + 7.168 =7.568%

Portflio Standard Deviation ={0.80x(8.96 - 7.568)2 + 0.20x(2.0-7.568)2}1/2 ={1.5501 + 6.2005 }1/2 =2.78%

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