Combining Risky and Risk-Free Assets



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Combining Risky and Risk-Free Assets

Portfolios that combine Risky and Risk-Free Assets

Check the boxes in the upper right corner to see all possible combinations of the risk-free asset (F) with each of the two risky assets (A and B). The slope of the straight line connecting the risk-free asset and a risky asset is known as the Sharpe Ratio, which is calculated as

$$\text{Sharpe Ratio}=\frac{\mu_\text{risky asset}-\mu_\text{risk-free asset}}{\sigma_\text{risky asset}}$$