The standard deviation of an efficient portfolio

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Suppose the expected return and the standard deviation on the Market Portfolio M are E (RM) = 12% and σM = 20%, respectively.

(a) When the Sharpe Ratio for the market portfolio is 0.5, what risk-free rate Rf is the market anticipate? Draw on a diagram for the Capital Market Line derived from the above data. Make sure to clarify the intercept and the slope.

(b) What should be an expected return of a well-diversified portfolio P (i.e. portfolios on the ML) with a volatility of 15%?

(c) Presume portfolio P has a standard deviation of 10% and an expected return of 6.5%. Is this portfolio efficient?

(d) What should be the standard deviation of an efficient portfolio with a beta of 0.4? Describe.

Reference no: EM1317509

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