3. Suppose the world only consists of two risky assets: IBM and Walmart (MSFT) and a risk free asset. Here are the details of each asset:
E[RIBM] = 8%, E[RWMT] = 5%, RF =1%.
sIBM=12%, sWMT=9%, Correl (IBM,WMT) =0.45
a) What is the portfolio comprised entirely of risky assets (i.e., only IBM and/or WMT) that has the highest Sharpe Ratio?
b) Report the returns and standard deviation for a portfolio that invests X% in portfolio found in part a and 1-X% in the risk-free asset. Let X vary from 0% to 150% in units of 10%.
c) What is the equation of the line reported in part B?
d) If you wanted a return of 10%, what is the smallest possible standard deviation you could have?
e) If you wanted a standard deviation of 8%, what is the maximum possible return you could earn?
f) Explain what it means to invest 150% in the portfolio found in part B and -50% in the risk-free rate? Would this ever be optimal? Why or why not?