Your investment advisor estimates that the expected return is 8.50% for the U.S. stock market index and 6.90% (in dollar terms) for the Japanese stock market index for the year of 2018. On the other hand, the standard deviation of returns would be 12.6% for the U.S. market and 14.2% for Japanese market. In addition, the correlation coefficient between the two markets would be 0.38. After some thoughts, you decided to invest 30% of your investment fund in the Japanese market and the remaining 70% in the U.S. market.
a. Compute the expected return and the standard deviation risk of this international portfolio.
b. Compute the expected Sharpe ratio of this portfolio. The 1-year U.S. T-bill rate for 2018 is 1.80%.