The market portfolio has an expected return of 11.6 percent and a standard devia

Question

The market portfolio has an expected return of 11.6 percent and a standard deviation of 21.6 percent. The risk-free rate is 4.6 percent.

What is the expected return on a well-diversified portfolio with a standard deviation of 8.6 percent? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

What is the standard deviation of a well-diversified portfolio with an expected return of 19.6 percent? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

The market portfolio has an expected return of 11.6 percent and a standard deviation of 21.6 percent. The risk-free rate is 4.6 percent.

Explanation / Answer

Solution a:

The expected return = risk free + S.d (market return - risk free )

= 4.6 + .086(.116 - .046)

Expected return = 4.606

Solution b:

4.606 = 4.6 + S.D( .116-.046)

.006 = .07S.D

S.D = .006/.07

=.085 = 8.5%

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