Please show all work, computations, formulas. Thanks! An optimal risky portfolio

Question

Please show all work, computations, formulas. Thanks!

An optimal risky portfolio has been developed with investments in stocks and bonds This optimal portfolio has 24% invested in bonds and the remainder invested in stocks The optimal portfolio mean return is 12.05% and its standard deviation is 18.45% The t-bill rate is 4.75%; what is the mean of the complete portfolio if 33% is invested in the optimal portfolio and theremainder is invested in T-bills? a What is the resulting allocation to stocks and bonds in this complete portfolio? b Calculate the Sharpe ratio for the complete portfolio lease showall computations Il a Express Excess return on a security in terms of Beta firm specificrisk alpha Ascatter diagram for D Corp shows observations of annual returns over a ten year period The Security characteristicLine [regression line] for D Corp shows the following Beta Alpha 1.25 3.25% If the market excess return is 17%, what is the expected return for D Corp? C Observation J shows an actual return of 25.25% when the market excess return is 17%. Comment on this finding RISK RETURN TRADEOFF WITH TWO RISKY ASSETS PORTFOLIOS EIRb] Sdevn b EIRS Sdevns Corr coeff 5.50% 7.85% b-bond fund s stock fund p portfolio with two risky assets 19.25% 0.22 Investor considering 45% stocks and 55% bonds Calculate b Portfolio Sdevn- assign 2

Explanation / Answer

question 3

let Ws=weight of stock=45%=0.45

Wb=weight of bonds=55%=0.55

A)

so, E[Rp]=Wb*E[Rb]+Ws*E[Rs]

E[Rp]=0.55*5.50%+0.45*11%=3.025%+4.95%=7.975%

B)

portfolio variance = Wb^2 * (Sdevn b)^2 + Ws^2 * (Sdevn s)^2 + 2WbWs*Corr(b,s)*(Sdevn b)*(Sdevn s)

=0.552*7.852+0.452*19.252+2*0.55*0.45*0.22*7.85*19.25

=18.64+75.04+16.46

=110.14

now portfolio sdevn=sqrt(variance)=sqrt(110.14)=10.495%

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