hi... this questions consists of 5 parts... the first part is already solved, bu

Question

hi... this questions consists of 5 parts... the first part is already solved, but the other 4 four parts need to be solved, could you please help me?

You are evaluating various investment opportunities currently available and you have calculated expected returns and standard deviations for five different well-diversified portfolios of risky assets:

portfolio

Expected return

Standard deviation

q

7.8%

10.5

r

10

14.0

s

4.6

5.0

t

11.7

18.5

u

6.2

7.5

a. For each portfolio, calculate the risk premium per unit of risk that you expect to receive ([E(R) ? RFR]/?). Assume that the risk-free rate is 3.0 percent

solution

risk premium per unit

Q= (7.8-3)/10.5= .4571

R=(10-3)/14 = .5

S= (4.6-3)/5=.32

T= (11.7-3)/18.5=.4703

U= (6.2-3)/7.5=.4267

. b. Using your computations in Part a, explain which of these five portfolios is most likely to be the market portfolio. Use your calculations to draw the capital market line (CML)

. c. If you are only willing to make an investment with ? = 7.0%, is it possible for you to earn a return of 7.0 percent?

d. What is the minimum level of risk that would be necessary for an investment to earn 7.0 percent? What is the composition of the portfolio along the CML that will generate that expected return?

e. Suppose you are now willing to make an investment with ? = 18.2%. What would be the investment proportions in the riskless asset and the market portfolio for this portfolio? What is the expected return for this portfolio?

portfolio

Expected return

Standard deviation

q

7.8%

10.5

r

10

14.0

s

4.6

5.0

t

11.7

18.5

u

6.2

7.5

Explanation / Answer

Hi,

Please find the answers as follows:

Part B:

Portfolio S is the market portfolio as it is having a risk premium of .32 which is close to the risk free rate of 3%.

Part C:

Expected Return = Risk Free Rate + SD of the Portfolio*(Expected Return of the Market - Risk Free Rate)/SD of the Market

Using the values:

Expected Return = 3 + 1*(7 - 3)/7 = 3.5714%

From the above calculations, it can be concluded that if we are willing to make an investment with a standard deviation of 7%, we cannot earn 7% return.

Part D:

Expected Return = Risk Free Rate + SD of the Portfolio*(Expected Return of the Market - Risk Free Rate)/SD of the Market

7 = 3 + SD of the Portfolio*(7-3)/7

On Solving we get,

SD of the portfolio = 7%

Therefore, the standard deviation of the portfolio should be 7%.

Part E:

Expected Return = Risk Free Rate + SD of the Portfolio*(Expected Return of the Market - Risk Free Rate)/SD of the Market

Expected Return = 3 + 1*(7-3)/18.2 = 3.2197 or 3.22%

Thanks.

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