Question

Given a market portfolio with an expected return of 10% and standard deviation of 20% and a risk-free rate of 5%, according to the Capital Market Line what is the expected return of a portfolio with a 30% standard deviation? Enter your answer as a percent. Do not include the % sign. Round your final answer to two decimals.

Answer 1

CML ret = Rf + [ SD of Portfolio / SD of Market ] [ Rm - Rf ]

Rf = Risk Free Rate

Rm = Market ret

CML ret = Rf + [ SD of Portfolio / SD of Market ] [ Rm - Rf ]

= 5% + [ 30% / 20% ] [ 10% - 5% ]

= 5% + 1.5 [ 5% ]

= 5% + 7.5%

= 12.5%

Expected Ret as per CML is 12.5%