Consider two portfolios. Portfolio A has an expected return of 12% and volatility of 11%. Portfolio B has expected return of 9% and volatility of 6%. The interest rate on a riskfree investment is 6% which can be held either long or short). Which of these two risky portfolios is definitely not on the efficient frontier? Show your work for full credit.)

Question

Quizplus · Accepted Answer

The Answer is Portfolio A's Sharpe Ratio is 9%-6%)/6% = 0.5. Portfolio B's Sharpe Ratio is 12%-6%)/11% = 0.55. Thus, Portfolio A can possibly be the Sharpe-Maximizing Portfolio its Sharpe Ratio is as high as B's). Thus, Portfolio A can possibly be on the efficient frontier.

Consider Two Portfolios