Suppose Stock AAA has monthly returns distributed uniformly between -4% and 10% while Stock BBB has monthly returns distributed uniformly between -6% and 12%. Furthermore, suppose that the correlation of the two stock returns is equal to 0.8. Let the risk free rate be is equal to 1%. Find the Sharpe ratio of a portfolio that places equal weight (50% each) in Stock AAA and Stock BBB. NOTE: the variance of a continuous uniform random variable between a and b is given by var = * (112) (b a)2 -

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
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Suppose Stock AAA has monthly returns distributed
uniformly between -4% and 10% while Stock BBB has monthly returns distributed uniformly
between -6% and 12%. Furthermore, suppose that the correlation of the two stock returns is
equal to 0.8. Let the risk free rate be is equal to 1%. Find the Sharpe ratio of a portfolio that
places equal weight (50% each) in Stock AAA and Stock BBB.
NOTE: the variance of a continuous uniform random variable between a and b is given by var
=
*
(112) (b a)2
-
Transcribed Image Text:Suppose Stock AAA has monthly returns distributed uniformly between -4% and 10% while Stock BBB has monthly returns distributed uniformly between -6% and 12%. Furthermore, suppose that the correlation of the two stock returns is equal to 0.8. Let the risk free rate be is equal to 1%. Find the Sharpe ratio of a portfolio that places equal weight (50% each) in Stock AAA and Stock BBB. NOTE: the variance of a continuous uniform random variable between a and b is given by var = * (112) (b a)2 -
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