Question
In: Finance
Consider two portfolios from the Capital Market Line (CML), A and B, given the following information:...
Consider two portfolios from the Capital Market Line (CML), A and B, given the following information:
Portfolio A: has an expected return of 10% and a standard deviation of 24%.
Portfolio B: has an expected return of 10.6% and a standard deviation of 26%.
a) Illustrate the CML, indicating portfolio A and B on CML.
b) What is the Sharpe ratio of portfolios located on the CML?
c) What is the risk-free rate?
d) Another portfolio, P, has an expected return of 9% and a standard deviation of 20%. Is this portfolio correctly priced?
Solutions
Expert Solution
a) Graph is there in the image
b) S= 0.3
c) Rf=2.8%
d) Standard deviation is 20%. Using CML, the expected return should be
R= 2.8% + (0.3 * 20%)=2.8%+6%= 8.8%
Hence, based on the risk in portfolio P, it should achieve a return of 8.8%. But the expected return of the portfolio is more than that. Hence, the portfolio is currently underpriced.
Kindly let me know if you have any doubt.
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jeff jeffy answered 3 months agoRelated Solutions
a) DEFINE WHAT IS MEANT BY THE CAPITAL MARKET LINE (CML), ...
a) DEFINE WHAT IS MEANT BY THE CAPITAL MARKET LINE
(CML),
USING BOTH THE DEFINITION AND THE SHORT E(rp )
EQUATION.
b) DEFINE WHAT IS MEANT BY THE SECURITY MARKET LINE
(SML),
AND PROVIDE THE GENERAL EQUATION FOR THE SECURITY
MARKET
LINE.
Using the properties of the capital market line (CML) and the security market line (SML), determine...
Using the properties of the capital market line (CML) and the
security market line (SML), determine which of the following
scenarios are consistent or inconsistent with the CAPM. Explain
your answers. Let A denote arbitrary securities while F and M
represent the riskless asset and the market portfolio
respectively.
a.
Security
E[R]
σ(R)
A
25%
30%
M
15%
30%
b.
Security
E[R]
σ(R)
A
25%
55%
F
5%
0%
M
15%
30%
Which of the following regarding the Capital Market Line (CML), is false? In equilibrium, the CAPM...
Which of the following regarding the Capital Market Line (CML),
is false?
In equilibrium, the CAPM says that the CML represents the best
risk-reward combinations available to all investors.
The slope of the CML is the risk premium on the market
portfolio divided by its standard deviation.
Although investors will try and achieve higher returns, the
forces of competition will move asset prices toward the CML.
The CML applies regardless of market conditions.
Show that any portfolio on the Capital Market Line (CML) with a positive weight in the...
Show that any portfolio on the Capital Market Line (CML) with a
positive weight in the market portfolio is perfectly correlated
with the market portfolio. Interpret this result.
21.With the aid of a diagram, describe the capital market line (CML). Your answer should include...
21.With the aid of a diagram, describe the capital market line
(CML). Your answer should include reference to the importance of
the slope of the CML. ‘If investors are rational they will all
choose risky assets in the same proportion when riskless asset
borrowing and lending is allowed’. Do you agree with this
statement? Explain your answer.
24.With the aid of a diagram, describe the security market line
(SML). Your answer should include reference to the importance of
the slope...
Explain the leverage effect on the Capital market line (CML). Give your own numerical example and...
Explain the leverage effect on the
Capital market line (CML). Give your own numerical example and
graph.
You are given the following information concerning three portfolios, the market portfolio, and the risk-free asset:...
You are given the following information concerning three
portfolios, the market portfolio, and the risk-free asset:
Portfolio
RP
σP
βP
X
12.5
%
38
%
1.45
Y
11.5
33
1.15
Z
9.4
23
0.80
Market
11.9
28
1.00
Risk-free
6.2
0
0
What are the Sharpe ratio, Treynor ratio, and Jensen’s alpha for
each portfolio? (A negative value should be indicated by a
minus sign. Leave no cells blank - be certain to enter "0" wherever
required. Do not round...
You are given the following information concerning three portfolios, the market portfolio, and the risk-free asset:...
You are given the following information concerning three
portfolios, the market portfolio, and the risk-free asset:
Portfolio
Rp
σp
βp
X
12.5
%
38
%
1.45
Y
11.5
33
1.15
Z
9.4
23
.80
Market
11.9
28
1.00
Risk-free
6.2
0
0
What are the Sharpe ratio, Treynor ratio, and Jensen’s alpha for
each portfolio? (A negative value should be indicated by a
minus sign. Leave no cells blank - be certain to enter "0" wherever
required. Do not round...
You are given the following information concerning three portfolios, the market portfolio, and the risk-free asset:...
You are given the following information concerning three
portfolios, the market portfolio, and the risk-free asset:
Portfolio
RP
σP
βP
X
12.5
%
34
%
1.50
Y
11.5
29
1.20
Z
7.1
19
0.80
Market
10.5
24
1.00
Risk-free
6.2
0
0
What are the Sharpe ratio, Treynor ratio, and Jensen’s alpha for
each portfolio?
You are given the following information concerning three portfolios, the market portfolio, and the risk-free asset:...
You are given the following information concerning three
portfolios, the market portfolio, and the risk-free asset:
Portfolio
RP
σP
βP
X
12.0
%
33
%
1.95
Y
11.0
28
1.25
Z
7.3
18
0.60
Market
11.4
23
1.00
Risk-free
6.8
0
0
Assume that the correlation of returns on Portfolio Y to returns
on the market is 0.84. What is the percentage of Portfolio Y’s
return that is driven by the market? (Round your answer to
4 decimal places.)
R-squared...
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