Solution_Practice Problems for Midterm

02 1 x 010 007 x 0375 375 therefore

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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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This document was uploaded on 03/12/2014.

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