Andrea Corbridge, Calculate the frontier for all possible investments combinations of Kalama Corp. and Adelphia Technologies (from 0% to 100%, in 1% increments). Determine the optimal risky portfolio if the risk-free rate is 3%.
Huh??
You're privy to information that we do not have.
To calculate the efficient frontier, we need to follow these steps:
1. Gather the necessary data: We need the expected returns and standard deviations for both Kalama Corp. and Adelphia Technologies.
2. Create a range of possible allocation percentages: In this case, we will use percentages from 0% to 100%, in 1% increments.
3. Calculate the expected return and standard deviation for each allocation mix: For each combination of allocation percentages, we can calculate the expected return and standard deviation using the formula below:
Expected Return = (Weight of Kalama Corp. * Expected Return of Kalama Corp.) + (Weight of Adelphia Technologies * Expected Return of Adelphia Technologies)
Standard Deviation = √((Weight of Kalama Corp.^2 * Variance of Kalama Corp.) + (Weight of Adelphia Technologies.^2 * Variance of Adelphia Technologies) + (2 * Weight of Kalama Corp. * Weight of Adelphia Technologies * Covariance))
Note: Variance is the square of the standard deviation, and the covariance represents the measure of how two stocks move together (i.e., their correlation).
4. Plot the risk (standard deviation) on the x-axis and the expected return on the y-axis for each allocation mix.
5. Identify the optimal risky portfolio: The optimal risky portfolio is the point on the efficient frontier where the Sharpe ratio is maximized. The Sharpe ratio is calculated as follows:
Sharpe Ratio = (Expected Return - Risk-Free Rate) / Standard Deviation
Calculate the Sharpe ratio for each allocation mix and determine the point with the highest Sharpe ratio. This point represents the optimal risky portfolio.
6. Analyze the results: Once you have the efficient frontier graph and the optimal risky portfolio, you can assess the risk-return tradeoff and make informed decisions based on your risk appetite.
You can calculate the frontier using statistical software like Excel or programming languages like MATLAB or Python, which have libraries for financial calculations. Make sure you have the necessary historical data for expected returns, variances, and covariance for both stocks to perform the calculations accurately.