FNCE30001 Study Guide - Final Guide: Sharpe Ratio, London Underground B Stock, Tangent

• School: University of Melbourne
• Department: Finance
• Course: FNCE30001
• Professor: Brown

Document Summary

The sharpe ratio of the portfolio will be unaffected. Changes to the weight of the risky asset in the portfolio change the denominator and numerator of the portfolio sharpe ratio by equal amounts. Problem 1. 2: without doing any math, the severe recession is worse and the boom is better. Thus, there appears to be a higher variance, yet the mean is probably the same since the spread is equally large on both the high and low side. The mean return, however, should be higher since there is higher probability given to the higher returns. Calculation of mean return and variance for the share fund: (a) (b) (c) (d) (e) (f) (g) Covariance has decreased because the share returns are more extreme in the recession and boom periods. This makes the tendency for share returns to be poor when bond returns are good (and vice versa) even more dramatic. Expected return = (0. 7 100%) + 0. 3 ( 50%) = 55%