Suppose that the return on a risk-free security is 5 percent. The expected return on the market portfolio is 16 percent and the volatility of the market portfolio is 22 percent
(a) Write down the equation for CML.
(b) Consider a portfolio on CML such that the expected return on the portfolio is 14 percent. What is the volatility of this portfolio? What percentages of your portfolio you need to invest on the risk-free security and the market portfolio in order to create this portfolio (i.e., the portfolio on the CML with expected return equal to 14 percent).
c) What is the volatility of the risk-free security? What is the correlation of the return on the risk-free security and the market portfolio? Show that the beta of the risk-free security is zero.
Suppose that the return on a risk-free security is 5 percent. The expected return on the market portfolio is 16 percent and the volatility of the market portfolio is 22 percent
(a) Write down the equation for CML.
(b) Consider a portfolio on CML such that the expected return on the portfolio is 14 percent. What is the volatility of this portfolio? What percentages of your portfolio you need to invest on the risk-free security and the market portfolio in order to create this portfolio (i.e., the portfolio on the CML with expected return equal to 14 percent).
c) What is the volatility of the risk-free security? What is the correlation of the return on the risk-free security and the market portfolio? Show that the beta of the risk-free security is zero.
Related questions
Tom's portfolio consists solely of an investment in Merck stock. Merck has an expected return of 13% and a volatility of 25%. The market portfolio has an expected return of 12% and a volatility of 18%. The risk-free rate is 4%. Assume that the CAPM assumptions hold in the market.
Assuming that Tom wants to maintain the current volatility of his portfolio, then the maximum expected return that Tom could achieve by investing in the market portfolio and risk-free investment is closest to:
| 13% | ||
| 12% | ||
| 15% | ||
| 16% |
Tom's portfolio consists solely of an investment in Merck stock. Merck has an expected return of 13% and a volatility of 25%. The market portfolio has an expected return of 12% and a volatility of 18%. The risk-free rate is 4%. Assume that the CAPM assumptions hold in the market.
Assuming that Tom wants to maintain the current volatility of his portfolio, then the maximum expected return that Tom could achieve by investing in the market portfolio and risk-free investment is closest to:
| 13% | ||
| 12% | ||
| 15% | ||
| 16% |
