I asked this question:

Given the following: You currently own $100,000 worth of Wal-Mart stock. Suppose that Wal-Mart has an expected return of 14% and a volatility of 23%. The market portfolio has an expected return of 12% and a volatility of 16%. The risk-free rate is 5%. Assuming the CAPM assumptions hold, what alternative investment has the highest possible expected return while having the same volatility as Wal-Mart? What is the expected return of this portfolio?

I got this response:

Answer

Explanation:

Solution

Since SD(RxCML) =xSD(RMkt)

So this means that 23 = x(.16)

Therefore we solve for x = .23/.16

x = 1.4375, as long the 144% market and short 44% risk-free.

So E[RxCML] =rf+x(E[RMkt] -rf)

Therefore E[RxCML] = .05 +1.4375(.12 - .05)

=.2081 x 100%

= 20.8%

NEW QUESTION:

How do you determine the long and short percentages ?? As in the response:

x = 1.4375, as long the 144% market and short 44% risk-free.

I understand how you arrive at x = 1.4375