Question
Suppose that investor A holds a portfolio (portfolio A) consisting of three shares. The portfolio return is equal to 15% while its risk (st.dev) equals
Suppose that investor A holds a portfolio (portfolio A) consisting of three shares. The portfolio return is equal to 15% while its risk (st.dev) equals 20%. The market portfolio (consisting of n shares) at this time of reference rewards investors with 24% and its risk equals 12%. The risk free interest rate is 6%.
Is this portfolio (portfolio A) an efficient one and why? What is the diversification benefit of another investor (investor B) who holds a perfectly diversified portfolio (portfolio B) which yields the same return with that of portfolio A (i.e. r=r=15%)? How can this portfolio (portfolio B) be constructed? How does the existence of the risk free interest rate affect the optimum portfolio construction? Explain.
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