Question
You are evaluating two investment alternatives. One is a passive market portfolio with an expected return of 8% and a standard deviation of 12%. The
You are evaluating two investment alternatives. One is a passive market portfolio with an expected return of 8% and a standard deviation of 12%. The other is a fund that is actively managed by your broker. This fund has an expected return of 11% and a standard deviation of 14%. The risk-free rate is currently 4%. Answer the questions below based on this information.
a. What is the slope of the Capital Market Line?
b. What is the slope of the Capital Allocation Line offered by your broker's fund?
c. You invest $700 in a portfolio C, which is composed of the fund managed by your broker and the risk-free asset. How much should you invest in the fund so that the expected return of portfolio C is 10%?
d. What is the standard deviation of portfolio C?
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