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	7.3	%	11.2	%
R	11.0		14.0
S	6.0		4.6
T	11.8		17.8
U	7.2		8.8

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 = 7.5%, is it possible for you to earn a return of 7.5 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 7.5% with a portfolio whose standard deviation is 7.5%.

4. What is the minimum level of risk that would be necessary for an investment to earn 7.5 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.

   w_MKT:

   w_{risk-free asset}:

5. Suppose you are now willing to make an investment with = 18.4%. 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.

   w_MKT:

   w_{risk-free asset}:

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

   %