You have a portfolio consisting of only two assets: $100,000 worth of Stock A, which has a standard deviation of returns of 10%, and $400,000 worth of Stock B, which has a standard deviation of returns of 20%. A and B have a correlation coefficient of 0.80. What is the standard deviation of returns of the portfolio?

a. Cannot be determined based on the information given

b. 0.1782

c. 0.1600

d. 0.2400

e. 0.1764

This question involves both concepts and some simple calculations. The CAPM implies that the market portfolio is the optimal risky portfolio, and thus is the best portfolio to use along with either borrowing or lending at the risk-free rate of interest. Consider the following assets or portfolios:

Asset Expected return Standard Deviation Covariance with the market A 9.0% 9.2% not given B 12.0% 13.5% not given C 13.0% 15.6% not given D 4.0% 6.0% 0.000% If you If the CAPM holds, and one of these four asset or portfolios is the market portfolio, which one is the market portfolio? Hint:: first, by inspection, you should know what the risk free rate must be (you will need it).

Asset/Portfolio A

Asset/Portfolio B

Asset/Portfolio C

Asset/Portfolio D

Not enough information to know

This is mostly a conceptual question about the investment strategy all investors should prefer to use according to the CAPM. Suppose the market portfolio has an expected return of 10%, Portfolio A has an expected return of 12%, and the risk-free rate is 2%. According to the CAPM, how should an investor optimally achieve an expected return of 11.0% if the investor has $100,000 in cash? (Note: One of the three below is correct, and given this is the case, you should not actually need to do any calculations to know which one.) All three of choices below achieve the desired expected return of 11%.

a. Invest $90,000 in Portfolio A, and lend $10,000 at the risk free rate.

b. Invest $112,500 in the market portfolio, and borrow $12,500 at the risk-free rate.

c. Invest $50,000 in Portfolio A, and invest $50,000 in the market portfolio.