Question

2. Lockheed has a standard deviation of 13% and Intel has a standard deviation of 9%. The correlation (p) between Lockheed and Intel is 0. a. Complete the following table and develop a graph of the investment opportunity (feasible) set of these two assets. Show your work and make a precise (to scale) graph. Note: If using Excel to graph, the scale on both axes must be the same or the graph will be incorrect. 75 % of Portfolio % of Portfolio Expected Return Portfolio Standard In Intel in Lockheed on Portfolio Deviation 100 25 50 25 100 b. Now add to the graph the capital market line (CML). No calculations are required. 50 75 C. Explain the difference between the CML and the SML (security market line).

Answer 1

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н г Lockheed Intel Expected Return 7.60% 0.13 6.80% 0.09 Risk Free Rate Market return 1.77% 8.00% SD a Expected Return of Portfolio = Weighted average of expected Return As Correlation between 2 securities is 0, Portfolio Standard Deviation = sqrt(Sd(i)^2*weight(i)^2+Sd(1)^2*weight(1)^2) Therefore Table is as follows Weight of Intel Weight of Lockheed Expected Return Formula 1.00 7.60% =+($C$2*B12)+($D$2*c12) 0.75 0.25 7.40% =+($C$2*B13)+($D$2*С13) 0.50 0.50 7.20% =+($C$2*B14)+($D$2*C14) 0.25 0.75 7.00% =+($C$2*B15)+($D$2*015) 1.00 6.80% =+($C$2*B16)+($D$2*C16) Expected SD 0.1300 =+SQRT($C$3^2*B12^2)+($D$3^2*C12^2)) 0.1001 =+SQRT($C$3^2*B13^2)+($D$3^2*C13^2)) 0.0791 =+SQRT($C$3^2*B14^2)+($D$3^2*C14^2)) 0.0749 =+SQRT($C$3^2*B15^2)+($D$3^2*C15^2)) 0.0900 =+SQRT($C$3^2*B16^2)+($D$3^2*C16^2))

INVESTMENT OPPORTUNITY 8.00% 7.00% 6.00% 5.00% RETURN 4.00% 3.00% 2.00% 1.00% 0.00% 0.0500 0.1000 0.1500 0.2000 0.2500 RISK

А 0.0500 RISK Capital Market Line Return Risk 1.77% 3.02% =0.0177+0.2*(0.08-0.0177) 0.20 The Difference Between CML and SML is as follows: CML is the Line that is in relation between SD and Return of a security.whereas SML is the line that is in relation between Beta ans Return of a security