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	8.1	%	11.8	%
R	9.8		13.7
S	4.6		5.2
T	11.4		18.3
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(Q R S T U)- has the -Select-(highest,lowest) 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

A.

B.

NOT SURE WHY GRAPH NOT BEEN DISPLAYED, please answer all other areas of the question.

C.

D.

c. If you are only willing to make an investment with = 8.8%, is it possible for you to earn a return of 8.8 percent? Do not round intermediate calculations. Round your answer to one decimal place.

Expected portfolio return: %

It -Select-(is or is not) possible to earn an expected return of 8.8% with a portfolio whose standard deviation is 8.8%.

1. What is the minimum level of risk that would be necessary for an investment to earn 8.8 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}:

2. Suppose you are now willing to make an investment with = 18.5%. 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.

   %