The risk free rate is 2% per annum. The market portfolio has an annual mean return of 14% and an annual return standard deviation is 26%. a.) A more cautious investor wishes to invest in another stock as he likes the low annual return standard deviation of 20%. This stock has an expected return of 7%. Construct for this investor a portfolio with the same return deviation but higher expected return, telling him what weights to employ and the return that he would expect. b.) Write down and interpret the CAPM equation that holds in this setting.
The risk free rate is 2% per annum. The market portfolio has an annual mean return of 14% and an annual return standard deviation is 26%. a.) A more cautious investor wishes to invest in another stock as he likes the low annual return standard deviation of 20%. This stock has an expected return of 7%. Construct for this investor a portfolio with the same return deviation but higher expected return, telling him what weights to employ and the return that he would expect. b.) Write down and interpret the CAPM equation that holds in this setting.
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 13P
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The risk free rate is 2% per annum. The market portfolio has an annual mean return of 14% and an annual return standard deviation is 26%.
a.) A more cautious investor wishes to invest in another stock as he likes the low annual return standard deviation of 20%. This stock has an expected return of 7%. Construct for this investor a portfolio with the same return deviation but higher expected return, telling him what weights to employ and the return that he would expect.
b.) Write down and interpret the CAPM equation that holds in this setting.
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