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?
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.
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 October 9, 2019, 5:35 pm ad1c9bdddfhttps://brainmass.com/business/capital-asset-pricing-model/what-expected-rate-of-return-would-a-security-earn-if-it-had-a-0-6-correlation-with-the-market-portf-61711
Solution Preview
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. 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?
-----------------------
First, we must calculate the standard deviation of the market portfolio using the Capital Market Line (CML):
The ...
Solution Summary
You will find the answer to this puzzling question inside...