A market consists of a risk-free asset with return 4% and two risky assets, A and B, with risk 10% and 20% respectively. The returns of the assets are independent. The tangent portfolio has weights (0, 0.6, 0.4).
a) Calculate the risk of the tangent portfolio.
b) Find the portfolio on the efficient frontier with risk 8%.
c) In part b, if the investor has $ 10,000, explain his investment strategy d) Suppose asset A has return 10% and asset B has return 5%. Find the portfolio on the efficient frontier with return 6%.
e) What is the Sharpe ratio of the portfolio in part d) ?