Question

To solve this problem, note that a well-diversified portfolio should lie on the Capital Market Line. The market portfolio has an expected return of 11.5 percent and a standard deviation of 19 percent. The risk-free rate is 4.1 percent. a. What is the expected return on a well-diversified portfolio with a standard deviation of 9 percent? b. What is the standard deviation of a well-diversified portfolio with an expected return of 20 percent?

Answer 1

Equation of CML:
return=risk free rate+standard deviation*(market return-risk free rate)/market standard deviation

1.
=4.1%+9%*(11.5%-4.1%)/19%
=7.6053%

2.
=(20%-4.1%)*19%/(11.5%-4.1%)
=40.8243%