Answer Happy

At the age of 20, you received $500,000 in cash from a family trust fund. You want to invest in the common stocks of your two favorite companies: The Walt Disney Company (DIS) and Google (GOOGL). Having examined the stocks' past performance, you obtain the following information: Disney (DIS) Google (GOOGL) Mean Return 25.7% 18.4% Standard Deviation 20.9% 27.7% Cov(r Disney, "Google) 0.0072 Further, after thorough analysis, you conclude that the risk-free rate will be 2%, and the market risk premium will stay at 6% with a standard deviation of 19.8%. 1. (3 points) Suppose that you are going to invest all your money ($500,000) in these two stocks. If your goal is to minimize your portfolio risk, how much of your money (in dollar amount) should be invested in Disney, and how much should be invested in Google? 2. (3 points) Again, suppose that you are going to invest all your money in these two stocks. Instead of minimizing your total risk, you decided to find the optimal risky portfolio as you did in the Risk Management and Insurance class. How much of your money (in dollar amount) should be invested in Disney, and how much should be invested in Google? 3.(4 points) Which portfolio, the minimum-variance portfolio in part 1 or the optimal risky portfolio in part 2, has a higher Sharpe Ratio? Compute this higher Sharpe ratio. Is it the highest among all possible portfolios formed with these two stock (i.e., combinations of the stocks with all possible weights)? Explain why briefly.