A portfolio that combines the risk-free asset and the market portfolio has an ex

Question

A portfolio that combines the risk-free asset and the market portfolio has an expected return of 6.1 percent and a standard deviation of 9.1 percent. The risk-free rate is 3.1 percent, and the expected return on the market portfolio is 11.1 percent. Assume the capital asset pricing model holds.

what expected rate of return would a security earn if it had a .36 correlation with the market portfolio and a standard deviation of 54.1 percent? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

  Expected rate of return

what expected rate of return would a security earn if it had a .36 correlation with the market portfolio and a standard deviation of 54.1 percent? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Answer is 20.12%

Explaination

From CAPM, we know that Expected return on sec = Risk free rate + (Market return - risk free rate)*Beta

And Beta = Correlation * standard deviation of security/s.d of market

So Beta = 0.36*.541/.091 = 2.14021978021978

Hance expected return = 3.1% + (11.1%-3.1%)*2.14021978

= 20.1217582417582% = 20.122%

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