1. Assume three securities have the same expected return and standard deviation. You are considering equal investment is two of the securities. Covariances are as follows: A with B = .032; A with C = 0; B with C = -.40. Which combination, if any, would you recommend holding due to the highest Sharpe ratio that would result from the combination?
A) A and B
B) B and C
C) A and C
D) Cannot determine with information provided.
2. A. What is true volatility?
B. Briefly discuss why the true volatility that should be used in the Black-Scholes formula might differ from the historical volatility.