Question
3. You are a financial advisor with responsibility for selecting investment portfolios for your firms clients. One of your analysts hands you some data for
3. You are a financial advisor with responsibility for selecting investment portfolios for your firms clients. One of your analysts hands you some data for two potential client portfolios, the market index, and the risk-free asset.
Expected Return | Beta | Standard Deviation | |
Portfolio A | 11% | 0.8 | 15% |
Portfolio B | 14% | 1.5 | 31% |
Market Index | 12% | 1 | 20% |
T-Bills | 6% | 0 | 0% |
a. According to the SML, what are the required returns for Portfolios A and B? (4 points)
b. Based on your answer to part a of the question, which portfolio would you choose for your clients? (4 points)
c. Do you have any concerns to convey to your analyst regarding the accuracy of any of the data presented above? Be very specific. (HINT: you may recall that the Market index should have the highest Sharpe ratio of any available portfolio). (4 points)
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