Question

Problem 6-10

You are evaluating various investment opportunities currently available and you have calculated expected returns and standard deviations for five different well-diversified portfolios of risky assets:

Portfolio	Expected Return		Standard Deviation
Q	7.0	%	11.8	%
R	9.9		14.8
S	4.2		4.7
T	12.6		16.0
U	6.3		7.2

1. For each portfolio, calculate the risk premium per unit of risk that you expect to receive ([E(R) - RFR]/σ). Assume that the risk-free rate is 2.0 percent. Round your answers to four decimal places.

   Q:

   R:

   S:

   T:

   U:

2. Using your computations in Part (a), explain which of these five portfolios is most likely to be the market portfolio. Round your answer to four decimal places.

   Portfolio -Select-QRSTUItem 6 has the -Select-highestlowestItem 7 ratio of risk premium per unit of risk,  , of these five portfolios so it is most likely the market portfolio.

   Choose the correct CML graph.

   The correct graph is -Select-graph Agraph Bgraph Cgraph DItem 9 .

   A.	$appletImage?dbid=456524294$
   B.	$appletImage?dbid=630202714$
   C.	$appletImage?dbid=675088437$
   D.	$appletImage?dbid=528241888$

3. If you are only willing to make an investment with σ = 8.0%, is it possible for you to earn a return of 8.0 percent? Do not round intermediate calculations. Round your answer to one decimal place.

   Expected portfolio return:   %

   It -Select is or is not possible to earn an expected return of 8.0% with a portfolio whose standard deviation is 8.0%.

4. What is the minimum level of risk that would be necessary for an investment to earn 8.0 percent? Do not round intermediate calculations. Round your answer to one decimal place.

     %

   What is the composition of the portfolio along the CML that will generate that expected return? Round your answers to four decimal places.

   w_MKT:

   w_{risk-free asset}:

5. Suppose you are now willing to make an investment with σ = 17.1%. What would be the investment proportions in the riskless asset and the market portfolio for this portfolio? Use a minus sign to enter negative values, if any. Round your answers to four decimal places.

   w_MKT:

   w_{risk-free asset}:

   What is the expected return for this portfolio? Round your answer to one decimal place.

     %

Answer 1

Portfolio	Return	SD	RP
Q	7	11.8	0.4237
R	9.9	14.8	0.5338
S	4.2	4.7	0.4681
T	12.6	16	0.6625
U	6.3	7.2	0.5972

Risk Premium (RP) = (Return - Risk-free rate) / SD, where Risk free rate = 2%

b) T has the highest risk premium per unit of risk.

c) Chart D is correct.