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Consider three stocks: Colonel Motors (C), Separated Edison (S), and Unique Oil (U). Consider riskless lending/borrowing at 6%. Std. Dev. . 6% Asset Expected Return Colonel Motors (C) 12% Separated Edison (S) 8% 8 Unique Oil (U) 18% 3% 15% The variance-covariance matrix is: Colonel Motors (C) Separated Edison (5) Unique Oil (U) 30 8 Colonel Motors (C) Separated Edison (S) Unique Oil (U) 20 17 8 9 20 17 240 Find the composition of the optimal portfolio obtained by combining the three stocks, knowing that short selling is allowed. What are the proportion of your funds invested in stocks C, S, and U (in this order)? (Hint: Use Excel and the in-class examples) Continuation of Question 1. Every investor will choose a combination between the risk-free asset and the optimal portfolio. Alison P invests 70% of her funds in the risk-free asset and 30% in the optimal portfolio. We call this portfolio P. Isaac B borrows at the risk-free rate to invest 110% of his original funds in the optimal portfolio. We call this portfolio Q (-10% of his funds in the risk-free asset and 110% invested in the optimal portfolio). Portfolio Q Expected return Optimal Portfolio Portfolio P 6% Standard deviation of return Which portfolio has a higher Sharpe ratio? Which portfolio has a higher Sharpe ratio? Portfolio P Portfolio Q The two Sharpe ratios are equal. We do not have enough information to compare the two Sharpe ratios Consider three stocks: Colonel Motors (C), Separated Edison (S), and Unique Oil (U). Consider riskless lending/borrowing at 6%. Std. Dev. . 6% Asset Expected Return Colonel Motors (C) 12% Separated Edison (S) 8% 8 Unique Oil (U) 18% 3% 15% The variance-covariance matrix is: Colonel Motors (C) Separated Edison (5) Unique Oil (U) 30 8 Colonel Motors (C) Separated Edison (S) Unique Oil (U) 20 17 8 9 20 17 240 Find the composition of the optimal portfolio obtained by combining the three stocks, knowing that short selling is allowed. What are the proportion of your funds invested in stocks C, S, and U (in this order)? (Hint: Use Excel and the in-class examples) Continuation of Question 1. Every investor will choose a combination between the risk-free asset and the optimal portfolio. Alison P invests 70% of her funds in the risk-free asset and 30% in the optimal portfolio. We call this portfolio P. Isaac B borrows at the risk-free rate to invest 110% of his original funds in the optimal portfolio. We call this portfolio Q (-10% of his funds in the risk-free asset and 110% invested in the optimal portfolio). Portfolio Q Expected return Optimal Portfolio Portfolio P 6% Standard deviation of return Which portfolio has a higher Sharpe ratio? Which portfolio has a higher Sharpe ratio? Portfolio P Portfolio Q The two Sharpe ratios are equal. We do not have enough information to compare the two Sharpe ratios

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