a. Use the following information: E[rXOM] = 15.6%, standard deviationXOM = 15.9% E[rMS]=29.7%, standard deviationMS = 35.2% Correlation of returns: ρXOM,MS = 0.139, rf=10% If the optimal amount to invest in the first asset (w) is 0.43, what is the variance of the risky portfolio when w=0.43? (write in decimal format using 5 decimal places) b. When choosing the best point of the POS (the curved line connecting two possible assets you can invest in) you need to find the point that: 1.Has the greatest difference between it’s return and the risk free rate, thus leading to the best return 2. You must solve for the optimal y allocation in order to find the best point on the POS 3. The point with the lowest standard deviation 4. The point with the greatest Sharpe ratio
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
a. Use the following information:
E[rXOM] = 15.6%, standard deviationXOM = 15.9%
E[rMS]=29.7%, standard deviationMS = 35.2%
Correlation of returns: ρXOM,MS = 0.139, rf=10%
If the optimal amount to invest in the first asset (w) is 0.43, what is the variance of the risky portfolio when w=0.43? (write in decimal format using 5 decimal places)
b. When choosing the best point of the POS (the
1.Has the greatest difference between it’s return and the risk free rate, thus leading to the best return
2. You must solve for the optimal y allocation in order to find the best point on the POS
3. The point with the lowest standard deviation
4. The point with the greatest Sharpe ratio
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