Solution_Practice Problems for Midterm

23 therefore fund x is better on the basis of the y

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 07 X = 0.375 = 37.5% Therefore, you should invest 37.5% of your wealth in the risk free bond and 62.5% in portfolio A. ⇒ 10. If the CAPM is correct, then the market portfolio has the highest Sharpe ratio. Since portfolio A has the higher Sharpe ratio, it must be the market portfolio. 11. The CAPM implies E(RA ) − RF = β A (E(RM ) − RF ) . E ( R A ) − RF .10 − .02 Cov ( R A , RM ) Therefore, β A = , we have = = 2 . Since β A = E ( RM ) − RF .06 − .02 Var ( RM ) Cov ( RA , RM ) = β AVar( RM ) = 2 × (.03) 2 = 0.0018 . E ( R X ) − RF 0.13 − 0.05 12. The Sharpe ratio of Fund X is = = 0.53 while that for Fund Y σX 0.15 E ( RY ) − RF 0.12 − 0.05 is = = 0.23 . Therefore, Fund X is better on the...
View Full Document

Ask a homework question - tutors are online