# 3. Suppose the world only cons

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?

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