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Define portfolios are positioned along capital market line

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Reference no: EM131715662

Broad diversified bundle of stocks is expected to return RMbar = 9%, with a variance of sM2 = 36%2. The risk-free rate of return RF = 1%.

a. Gabrielle is somewhat cautious, so she invests 30% of her $10,000 portfolio in stocks, and 70% in risk-free Treasury bills. What is the expected return, standard deviation and coefficient of variation for her portfolio?

b. Gabrielle's friend Thomas is more adventuresome. He also has $10,000 in funds, but he invests twice that much in the stock market by using his stockbroker's margin account. (That is, he borrows another $10,000 to buy stocks). What is the expected return, standard deviation and coefficient of variation for his portfolio? How much interest (in $) must he pay back to the broker per year?

c. Their friend Sarah wants to earn a return of 12%. What should her portfolio weights be for stocks and for Treasury bills? What is the standard deviation and CV for this portfolio?

d. Sketch a graph showing how these friends' portfolios are positioned along the capital market line.

Reference no: EM131715662

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