A portfolio that combines the risk-free asset and the market portfolio has an expected return of 22 percent and a standard deviation of 5 percent. The risk-free rate is 4.9 percent, and the expected return on the market portfolio is 19 percent. Assume the capital-asset-pricing model holds.

Question: What expected rate of return would a security earn if it had a 0.6 correlation with the market portfolio and a standard deviation of 3 percent?

Solution Preview

First, we must calculate the standard deviation of the market portfolio using the Capital Market Line (CML):

The risk-free rate asset has a return of 4.9% and a standard deviation of zero and the portfolio has an expected return of 22% and a standard deviation of 5%. These two points must lie on the Capital Market Line.

The slope of the Capital Market Line is:

Slope of CML = Increase in Expected Return / Increase in Standard Deviation
= (0.22- ...

Solution Summary

In about 350 words, this solution explains the calculation for the expected rate of return of a security given its correlation with the market. All calculations are provided.

... Mark-to-market Other entries Account Balance Explanation Monday morning ... yields and expected capital gains, the expected rate of return on portfolios A: 11 ...

Explanation to "Cost of capital" question. ... firms should invest in assets only if they expect them to ... calculated as the present value of the expected future free ...

... 1. How much should Elton John invest at the end of each year for six years if he expects to earn 6% and h wants ...Explanation: Rate of return=RATE= 6% Numebr ...

... of a detailed explanation to find the expected rate of return on this R&D expenditure and its R&D decision making. Question 4. Suppose a firm expects that a $20 ...

... An explanation of an expectation of the level ... for the pharmaceutical industry, you expect the rate... following probabilities: Compute the expected rate of return...

... Stock Weight (wi) return ri wi ri Explanation J 40.82 ... Answer: The expected return on the above portfolio= 8.98%. ... State of Probability of Rate of Return if State ...

... Beta beta i wi beta i Explanation Stock A ... risk free rate= rf = 5% beta of stock= beta A ... 1) Returns on an investment: Calculates the expected return and standard ...

... This solution is comprised of a detailed explanation to answer what is the expected return on a stock with ...Expected return = risk free rate + beta(return...