Question

QUESTION 10 5 points Use the following information to answer the next two questions. Assume the return on the S&P 500 Index is 20%, while its standard deviation is 15%. Treasury bills yield a 5% rate of retum. You'd like to create a portfolio consisting of the S&P 500 Index and t-bills. You want the standard deviation of your portfolio to be 18%. Find the return of your portfolio according to the CML. Round intermediate steps to four decimals. 25 0.18 O.175 None of the above. 5 points Save Ans QUESTION 11 Find the weight of the risk free asset in your portfolio according to the CML Round internediate steps to four decimals O-1667 20 .1667

Answer 1

Ques-10)

Formula of CML:

(Rm - Rf) ER, = R+

where, ERs = Expected Return of Portfolio

Rf = Risk-free return = 5%

Rm = Rate of Return = 20%

(0.20 – 0.05) ER, = 0.05+ -* 0.18 0.15

So, ERs = 0.23

OPTION D

Ques-11)

Expected return of portfolio = 23%

Let us assume the weight of risk Free asset be X

& the weight of portfolio be (1-X)

Expected return = (WRF)*(RRF) + (WS)*(RS)

0.23 = (X)(0.05) + (1-X)(0.20)

0.23 = 0.05X + 0.20 - 0.20X

0.03 = -0.15X

X = -0.2

So, the weight of Risk free asset in portfolio is -0.20

Hence, Option D. None of the above

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