1. I should choose Fund D, largest sharpe ratio. Expected Return Std. Dev 0.16 0.12 0.14 0.1 0.12 0.08 0.7 0.06

A fund B fund C fund corr A,C Rf Sharpe Ratios A fund B Fund C Fund D Fund Expected return Variance D Std Dev D Starpe Ratio D

0.833333333 0.8 0.75

0.144 0.0094336 0.097126721 0.864849537

2. Portfolio variance equals: σ2p= ω21σ21 + ω22 σ22 + 2ω1ω2ρ1,2σ1 σ2 If, Cov (i,j) equals 0, then the correlation between both funds will also equal zero and thus, the variance simplifies to: σ2p= ω21σ21 + ω22 σ22. a. σ2p = b. σ2p = c. σ2p = σ21 + σ21 + σ21 + σ22 σ22+ σ22+ σ23 σ23 σ24

3. a. To calculate excess return, use the equation Rm – Rf , which equals 0.06 b. Rf = 0.06 E(RM) = 0.12 STD(RM) = 0.15 0.06 0.12 0.15

beta beta B
E(Rp)=Rf+Bi [(E(rm)-Rf)

1.2 0.6

Return Asset A Asset B

0.132 0.096

d. E(Ri) Rf E(RM) Expected return

0.03 0.06 0.12 -0.5

e. Yes, if the risky asset has a negative beta, it is used as “insurance” to balance the portfolio and provide returns when the overall market goes down. 4. The sharpe ratio provides a good estimate of the relative quality of each fund. If one were to create a portfolio from these funds, you can calculate the sharpe ration for the portfolio and compare which portfolio make up gives the best expected return.