Question

4. Investor equilibrium The following graph shows the set of portfolio opportunities for a multiasset case. The point RF corresponds to a risk-free asset, the red curve BME is the efficient frontier, the shaded area under the efficient frontier represents the feasible set of portfolios of risky assets, and the yellow curves II and I2 are indifference curves for a particular investor. EXPECTED RATE OF RETURN (Percent) 10 RISK (Portfolio's standard deviation) The points on the line PRF MZ represent: o Portfolios that are dominated by portfolio A The best attainable combinations of risk and return Portfolios with the smallest degree of risk for a given expected return o Portfolios that are dominated by any portfolio at any point on the efficient frontier BME

Answer 1

Q1) B) The best attainable combination of risk and return

explanation: The capital market line represents the best combination of risk risk and return. Any point on the line provides the best return for the risk taken.

Q2)A) The return on risk free asset,Rf

explanation: Rf stands for risk free rate . The rate at which money is borrowed or lent.

Q3)B) 13.30%

explanation: expected return = Rf + Rm - Rf × std deviation of portfolio/ std deviation of market

Expected return= 10% + 15% - 10% × 10%/15%

= 10% + 5% × 0.6667

= 10% + 3.33%

= 13.33%

Q4)B) higher

explanation: As the risk increases, the return of the asset also increases. This is because you need higher return to compute for the higher risk taken.