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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	8.9	%	10.0	%
R	10.2		13.4
S	4.7		5.3
T	11.2		16.2
U	6.0		8.4

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:

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.

If you are only willing to make an investment with = 7.0%, is it possible for you to earn a return of 7.0 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 7.0% with a portfolio whose standard deviation is 7.0%.

What is the minimum level of risk that would be necessary for an investment to earn 7.0 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}:

Suppose you are now willing to make an investment with = 17.0%. 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.

%