Explore BrainMass

# An Explanation of the Expected Rate of Return

Not what you're looking for? Search our solutions OR ask your own Custom question.

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

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?

© BrainMass Inc. brainmass.com September 27, 2022, 11:14 am ad1c9bdddf

#### 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.

\$2.49