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Your investment portfolio consists of $ 1 8 , 0 0 0 invested in only one stock - Amazon. Suppose the risk - free rate
Your investment portfolio consists of $ invested in only one stockAmazon. Suppose the riskfree rate is
Amazon stock has an expected return of and a volatility of and the market portfolio has an expected return of
and a volatility of Under the CAPM assumptions,
a What alternative investment has the lowest possible volatility while having the same expected return as Amazon?
What is the volatility of this investment?
b What investment has the highest possible expected return while having the same volatility as Amazon? What is the
expected return of this investment?
Hint: Make sure to round all intermediate calculations to at least five decimal places.
a What alternative investment has the lowest possible volatility while having the same expected return as Amazon?
To create an alternative investment that has the lowest possible volatility while having the same expected return
as Amazon, we use the following strategy:
Sell: $ worth of Amazon stock. Round to the nearest dollar.
Borrow: $ at the riskfree rate. Round to the nearest dollar.
Buy: $ worth of the market portfolio. Round to the nearest dollar.
Buy: $ worth of the riskfree investment. Round to the nearest dollar.
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