Purchase Solution

An Explanation of the Expected Rate of Return

Not what you're looking for?

Ask Custom Question

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?

Purchase this Solution

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.

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- ...

Purchase this Solution

Free BrainMass Quizzes
Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.

Operations Management

This quiz tests a student's knowledge about Operations Management

Basic Social Media Concepts

The quiz will test your knowledge on basic social media concepts.

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.