Problem 3: Evaluating portfolio performanceAssume you have two investment opportunities.1. Corporate Disasters (CD) has expected returns E(RcD) = 4% and standard deviation ofreturns 9%.2. Nevada beach front properties (NBF) has expected returns E(RygF) = 10% and standarddeviation of returns 18%Risk free rate is R; = 1%.a) Calculate Sharpe ratios of these two portfolios.b) Assume you can invest only in one of those companies (and a risk free rate). Assumeyour target rate of return is 6%. Calculate portfolios with CD&RF and NBF&RF whichwould deliver this return. Which portfolio has smaller standard deviation and why?c) Assume you have a portfolio which is not efficient. Assume Corporate Disasters havemarket beta of ßep = 0.5 and Nevada beach front properties have market betaBNef = 4. Calculate Treynor measures for those securities. Which one should you add toyour portfolio to increase the Sharpe ratio.

Sharpe Ratio = [E(R) - Rf] / σ where E(R) is the expected return of the security, σ is the standard…

Answered: Problem 3: Evaluating portfolio…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Course: FinanceAs a great investor, you are interested in 3 assets to invest: A, B and C. A financial advisor tells you that the returns on the assets are independent of each other, and you are given the following data: Asset A B C E(Ri) 0.05 0.035 0.06 Variance 0.0015 0 0.008 You have not yet analyzed what your degree of risk aversion (A) is, but you know that your utility function behaves as follows: U[ E(Rp)] = E(Rp) - 0.5 * A * Variance. (See attached image for a better understanding) You are asked to:(a) Find the optimal portfolio with these 3 assets {called wA, wB and wC}.b) Calculate the expected return and risk of the optimal portfolio for the following degrees of risk aversion (A):(i) A = 5(ii) A = 10(iii) A = 16 Please ASAP

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