The CEO wants an update on risk and feels believes the best way to do this is to discuss the relationship between risk and return and explain it in the context of the company's cost of capital.

Here is the information that we have:

The company's beta is 1.2.
The risk-free rate is 3%.
The required market return is 8%.
calculate the SML and discuss the pros and cons of using this measure.

I need a graph but am unsure how to proceed

Determine the relationship between risk and return by calculating stock and portfolio variance and understanding the security market line.

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The response addresses the queries posted in 481 words.

// To understand the concept of Cost of Capital in a Company; it is necessary to have an update on risk and also recognize the relationship between risk and return in context to the Company. This relationship has been explored, based on the calculation of stock and portfolio variance and by understanding the security market line in the following manner: //

The SML equation is given by:

Re = Rf + (Rm - R f) β e

= 3 + (8- 3) *1.2

= 9%

SML is a unique technique for calculation of expected return which incorporates ...

B. Assume there are only two assets in a portfolio. If this portfolio has a positive weight for each asset, can its (portfolio.s) variance be greater than the variance of returns on the asset in the portfolio that has the higher variance of the two? Explain. Can the variance of the portfolio be smaller than the variance of retur

Year Stock A Stock B
1998 .3 .1
1999 .0 .0
2000 .5 .1
2001 .2 .3
2002 .3 .3
2003 -.2 -.1
2004 .5 .0
2005 .1 .2
2006 -.1 .2
2007 .4 .3
E(R) .20 .14
Sigma .232 .136
a. Prepare a plot showing in the portfoliovariance for various combinations of Stocks A and B
b. Find the minimum varianceportfolio
c. Find the pro

Question: A portfolio is made up of 75% of stock 1, and 25% of stock 2. Stock 1 has a variance of .08, and stock 2 has a variance of .035. The covariance between the stocks is -.001. Calculate both the variance and the standard deviation of the portfolio.

Suppose the expected returns and standard deviations of stocks A and B are E(Ra) =0.15, E(Rb) = 0.25, Stdev A = 0.1, and Stdev B = 0.2, respectively. Calculate the expected return and standard deviation of a portfolio that is composed of 40% A and 60% B when the correlation between the returns on A and B is 0.5.

Note: Please see the attachment to view the table which is needed for this question.
Question: You invest 30% in Ham and 70% in Cheese. Find the return and variance on the portfolio. You must calculate: expected return for both firms; standard deviation or variance (assume it is a population (n observations)) for both firms;

The standard deviation of the rate of return for Lind Distributing is 18% while that for Henry Manufacturing is 22%. If the correlation between their returns is -0.25, what is the standard deviation of a portfolio composed 70% of Lind and 30% of Henry common stock?

1. What is the correlation coefficient?
2. What is the amount to put in the bond fund to achieve the minimum varianceportfolio?
3. What is the expected return, variance, and standard deviation on this portfolio?
4. What is the slope of a line going from Rf through this portfolio?
5. What is the utility of this portfolio?
6

An investor has a 30% position in A and 70% position in B.
Period A B
1 -.04 .11
2 .15 .41
3 .21 -.13
4 .18 .39
1. Calculate the variance and the return on the entire portfolio.
2. Calculate the expected return for both firms along with the standard devia

Assume that the risk free rate of return is 3% and the market portfolio on the capital market line (CML) has an expected return of 11% and a standard deviation of 14%. How should you invest $100 000 if you are only willing to accept a total portfolio risk of 8%?

Suppose you hold 2 stocks in your portfolio, which have same variance (the covariance is any number) You want to minimize the portfoliovariance (don't care about the mean) What will be the optimal weights?