Unformatted text preview: =1 40 &
i=1 40
Therefore, the standard deviation of the portfolio is 20.55%. E ( R A ) − RF 0.10 − 0.02
9. The Sharpe ratio of Portfolio A is =
= 1.60 while that for σA
0.05
E ( RB ) − RF 0.20 − 0.02
Porfolio B is =
= 1.50 . Since A has the higher Sharpe ratio, σB
0.12
you would combine portfolio A with the risk free rate to achieve a 7% expected return. Let X be the fraction of your wealth invested in the risk free rate and 1 − X the fraction invested in portfolio A . To achieve a 7% expected return, we require that E ( RP ) =
XE ( RF ) + (1 − X ) E ( RA )
= X × 0.02 + (1 − X ) × 0.10 = 0....
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 Spring '14
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