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  3. 1. you have $7,000 to invest. you've done some sec

1. You have $7,000 to invest. You've done some security analysis and generated the following...

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Accounting

1. You have $7,000 to invest. You've done some security analysis and generated the following data for three stocks and Treasury bills, including weights in the optimal risky portfolio (ORP) from doing Markowitz portfolio optimization:

Security Stock A Stock B Stock C T-bills
Expected return (%) 12 11 5 1
Variance 0.04 0.03 0.02 0
Beta 1.2 1.5 0.8 0
Weight in ORP (%) 44 18 38 0

a. If you want to achieve an expected return of 8% for the complete portfolio, how much money should you invest in stock B (in $)?

b. What is the ratio of the Sharpe ratio of the complete portfolio to the Sharpe ratio of the ORP?

2. You've done some security analysis and generated the following data for two stocks and Treasury bills:

Security Stock A Stock B T-bills
Expected return (%) 12 10 2
Standard deviation 0.2 0.12 0
Correlation with stock A 1 0.5 0

a. What is the weight of stock A in the optimal risky portfolio?

b. What is the Sharpe ratio of the optimal risky portfolio (ORP)?

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