A portfolio invests in a risk-free asset and the market portfolio has an expected return of 7% and a standard deviation of 10%. Suppose risk-free rate is 5%, and the standard deviation on the market portfolio is 22%. For simplicity, assume that correlation between risk-free asset and the market portfolio is zero and that the risk-free asset has a zero standard deviation. According to the CAPM, which of the following statements is/are correct?

Question

A portfolio invests in a risk-free asset and the market portfolio has an expected return of 7% and a standard deviation of 10%.  Suppose risk-free rate is 5%, and the standard deviation on the market portfolio is 22%.  For simplicity, assume that correlation between risk-free asset and the market portfolio is zero and that the risk-free asset has a zero standard deviation.  According to the CAPM, which of the following statements is/are correct?

Answer

This portfolio is as risky as the market index.

Answer

This portfolio has a reward to risk ratio that is higher than market average.

Answer

Market risk premium is roughly 6.60%.

Answer

This portfolio’s beta is roughly 0.5455.

Answer

This portfolio has invested roughly 54.55% in the market portfolio.

Crowdly

A portfolio invests in a risk-free asset and the market portfolio has an expecte...

Want instant access to all verified answers on moodle.uleth.ca?