Let's assume you live in a world where there are only 2 risky assets, asset C and asset D. There is also a risk free asset. You have the following information about the assets:
Asset C Asset D Risk free (F)
Expected Return 7% 18% 5%
Standard Deviation 17% 27% 0%
a. If you do NOT have the option to make a portfolio, which asset you pick? Explain why in two lines max.
i. Asset C
ii. Asset D
iii. Asset F
iv. It depends
b. You try all different combinations of assets C and D and you realize that P2 (50% in C and 50% in D) gives you the highest Sharp ratio. You call P2 the optimal risky portfolio or the tangency portfolio.
You have a client who seeks your advice on how to invest her money to have 9.5% expected return.
What combinations of assets/portfolios would you recommend her to invest in?