Five different well-diversified portfolios of risky assets

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

Portfolio Expected Return Standard Deviation
Q 7.80% 10.50%
R 10% 14%
S 4.60% 5%
T 11.70% 18.50%
U 6.20% 7.50%

a. For each portfolio, calculate the risk premium per unit of risk that you expect to receive
([E(R)- RFR]/sd). Assume the risk free rate is 3%.


b. Using your computations in Part a, explain which of these five portfolios is most
likely to be the market portfolio. Use your calculations to draw the CML.
c. If you are only willing to make an investment with sd = 7%, is it possible for you to earn a return
of 7%?
d. What is the minimum level of risk that would be necessary for an investment to earn 7%.
What is the composition of the portfolio along the CML that will generate that expected return?
e. Suppose you are now willing to make an investment with sd=18.2%. What would be the investment proportions in the
riskless asset and the market portfolio for the portfolio? What is the expected return for this portfolio?

 

Reference no: EM13322443

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