For the upcoming year, the risk-free rate is 2 percent, and the expected return to the market is 7 percent, and the standard deviation of the market is 20 percent. You are also given the following covariance matrix for Securities J, K, and L. Security L 0.0019711 Covariance Security J Security K Security J 0.0012532 0.0010344 Security K 0.0010344 0.0023717 0.0013558 Security L 0.0019711 0.0013558 0.0048442 Also assume that you form a portfolio by putting 40 percent of your funds in Security J, O percent of your funds in Security K, and 60 percent of your funds in Security L. Based on this information, determine the required return of the resulting portfolio, based on the Capital Market Line (CML).
For the upcoming year, the risk-free rate is 2 percent, and the expected return to the market is 7 percent, and the standard deviation of the market is 20 percent. You are also given the following covariance matrix for Securities J, K, and L. Security L 0.0019711 Covariance Security J Security K Security J 0.0012532 0.0010344 Security K 0.0010344 0.0023717 0.0013558 Security L 0.0019711 0.0013558 0.0048442 Also assume that you form a portfolio by putting 40 percent of your funds in Security J, O percent of your funds in Security K, and 60 percent of your funds in Security L. Based on this information, determine the required return of the resulting portfolio, based on the Capital Market Line (CML).
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:For the upcoming year, the risk-free rate is 2 percent, and the expected return to the market
is 7 percent, and the standard deviation of the market is 20 percent. You are also given the
following covariance matrix for Securities J, K, and L.
Covariance Security J Security K
Security J 0.0012532 0.0010344
Security K 0.0010344 0.0023717 0.0013558
Security L 0.0019711 0.0013558 0.0048442
Also assume that you form a portfolio by putting 40 percent of your funds in Security J, O
percent of your funds in Security K, and 60 percent of your funds in Security L. Based on
this information, determine the required return of the resulting portfolio, based on the
Capital Market Line (CML).
O 3.17%
O 2.94%
O 3.49%
O 3.34%
Security L
0.0019711
O 3.64%
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