Problem:

You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns of the assets are 8 percent and 13 percent, respectively. The standard deviations of the assets are 30 percent and 38 percent, respectively. The correlation between the two assets is 0.43 and the risk-free rate is 5.6 percent.

Requirement:

Question 1: What is the optimal Sharpe ratio in a portfolio of the two assets?

Question 2: What is the smallest expected loss for this portfolio over the coming year with a probability of 5 percent?

Note: Show all workings.