You are evaluating various investment opportunities currently available and you have calculated expected returns and standard deviations for five different well-diversified portfolios of risky assets. PORTFOLIO EXPECTED RETURN STANDARD DEVIATION Q 7.8% 10.5% R 10.0% 14.0% S 4.6% 5.0% T 11.7% 18.5% U 6.2% 7.5% a) For each portfolio, calculate the risk premium per unit of risk that you expect to receive [(E(R) –RFR)/ơ]. Assume that the risk free rate is 3.0%. b) Using computation in Part a, explain which of these five portfolios is most likely to be the market portfolio. Use your calculation to draw the capital market line (CML). c) If you are only willing to make an investment with ơ=7.0%, is it possible for you to earn a return of 7.0%? d) What is the minimum level of risk that would be necessary for an investment to earn 7.0%? What is the composition of the portfolio along the CML that will generate that expected return? e) Suppose you are now willing to make an investment with ơ=18.2%. What would be the investment proportions in the riskless asset and the market portfolio for this portfolio? What is the expected return for this portfolio?

You are evaluating various investment opportunities currently available and you have calculated expected returns and standard deviations for five different well-diversified portfolios of risky assets. PORTFOLIO EXPECTED RETURN STANDARD DEVIATION Q 7.8% 10.5% R 10.0% 14.0% S 4.6% 5.0% T 11.7% 18.5% U 6.2% 7.5% a) For each portfolio, calculate the risk premium per unit of risk that you expect to receive [(E(R) –RFR)/ơ]. Assume that the risk free rate is 3.0%. b) Using computation in Part a, explain which of these five portfolios is most likely to be the market portfolio. Use your calculation to draw the capital market line (CML). c) If you are only willing to make an investment with ơ=7.0%, is it possible for you to earn a return of 7.0%? d) What is the minimum level of risk that would be necessary for an investment to earn 7.0%? What is the composition of the portfolio along the CML that will generate that expected return? e) Suppose you are now willing to make an investment with ơ=18.2%. What would be the investment proportions in the riskless asset and the market portfolio for this portfolio? What is the expected return for this portfolio?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 18P

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PORTFOLIO EXPECTED RETURN STANDARD DEVIATION

Q 7.8% 10.5%

R 10.0% 14.0%

S 4.6% 5.0%

T 11.7% 18.5%

U 6.2% 7.5%

a) For each portfolio, calculate the risk premium per unit of risk that you expect to receive [(E(R) –RFR)/ơ]. Assume that the risk free rate is 3.0%.
b) Using computation in Part a, explain which of these five portfolios is most likely to be the market portfolio. Use your calculation to draw the capital market line (CML).
c) If you are only willing to make an investment with ơ=7.0%, is it possible for you to earn a return of 7.0%?
d) What is the minimum level of risk that would be necessary for an investment to earn 7.0%? What is the composition of the portfolio along the CML that will generate that expected return?
e) Suppose you are now willing to make an investment with ơ=18.2%. What would be the investment proportions in the riskless asset and the market portfolio for this portfolio? What is the expected return for this portfolio?

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