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eBook Problem 6-10 You are evaluating various investment opportunities currently available and you have calculated expected returns and standard deviations for five different well-diversified portfolios

eBook

Problem 6-10

You are evaluating various investment opportunities currently available and you have calculated expected returns and standard deviations for five different well-diversified portfolios of risky assets:

Portfolio Expected Return Standard Deviation
Q 8.7 % 10.0 %
R 9.7 14.3
S 5.8 4.9
T 11.2 18.1
U 6.5 8.2
  1. For each portfolio, calculate the risk premium per unit of risk that you expect to receive ([E(R) - RFR]/). Assume that the risk-free rate is 4.0 percent. Round your answers to four decimal places.

    Q:

    R:

    S:

    T:

    U:

  2. Using your computations in Part (a), explain which of these five portfolios is most likely to be the market portfolio. Round your answer to four decimal places.

    Portfolio -Select-QRSTUItem 6 has the -Select-highestlowestItem 7 ratio of risk premium per unit of risk, , of these five portfolios so it is most likely the market portfolio.

    Choose the correct CML graph.

    The correct graph is -Select-graph Agraph Bgraph Cgraph DItem 9 .

    A.

    B.

    C.

    D.

  3. If you are only willing to make an investment with = 6.6%, is it possible for you to earn a return of 6.6 percent? Do not round intermediate calculations. Round your answer to one decimal place.

    Expected portfolio return: %

    It -Select-isis notItem 11 possible to earn an expected return of 6.6% with a portfolio whose standard deviation is 6.6%.

  4. What is the minimum level of risk that would be necessary for an investment to earn 6.6 percent? Do not round intermediate calculations. Round your answer to one decimal place.

    %

    What is the composition of the portfolio along the CML that will generate that expected return? Round your answers to four decimal places.

    wMKT:

    wrisk-free asset:

  5. Suppose you are now willing to make an investment with = 18.8%. What would be the investment proportions in the riskless asset and the market portfolio for this portfolio? Use a minus sign to enter negative values, if any. Round your answers to four decimal places.

    wMKT:

    wrisk-free asset:

    What is the expected return for this portfolio? Round your answer to one decimal place.

    %

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