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 ...

... from a project by discounting all expected future cash ... in situations where the required rate of return... Answer: TRUE Explanation: There is not requirement that ...

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 ...

... weights of stock A, B rA, rB= expected returns of stock A ... Weights Beta βi wi βi Security Explanation of calculations wi ... market line if the risk-free rate is 6 ...

... your portfolio's expected return should equal the expected return on the ... Answer Key with explanations: ...Explanation: Statement a is false, since the correlation ...

... or operating costs, could be expected to lower the ... d. 4.96% e. 5.21% (ANSWER) Explanation: Industry average ... Management expects sales to be $301,770, operating ...

Discount Rate Explanation. ... it is hard to estimate the beta that investors expect the company ... the riskiness of a security, the higher its expected return must be ...

... This solution provides explanations and step by step ... beta coefficients, cost of equity, and expected rate of return...Explanation of beta: Beta measures a stock's ...

... 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 ...