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How do we calculate the expected return on a portfolio?
The expected return of a portfolio is the average of the expected returns on the assets in the portfolio weighted by their proportion in the total portfolio value.
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- Write out the equation for the Capital Market Line (CML), and draw it on the graph. Interpret the plotted CML. Now add a set of indifference curves and illustrate how an investors optimal portfolio is some combination of the risky portfolio and the risk-free asset. What is the composition of the risky portfolio?What is a characteristic line? How is this line used to estimate a stocks beta coefficient? Write out and explain the formula that relates total risk, market risk, and diversifiable risk.How does the size of the initial investment affect the internal rate of return on the net present value models?