Question
Your investment portfolio consists of $19,000 invested in only one stockAmazon. Suppose the risk-free rate is 5%, Amazon stock has an expected return of 12%
Your investment portfolio consists of $19,000 invested in only one stockAmazon. Suppose the risk-free rate is 5%, Amazon stock has an expected return of 12% and a volatility of 43%, and the market portfolio has an expected return of 9% and a volatility of 20%. 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: $nothing at the risk-free rate. (Round to the nearest dollar.) Buy: $ worth of the market portfolio.(Round to the nearest dollar.) Buy: $nothing worth of the risk-free investment. (Round to the nearest dollar.)
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