Investment Management Inc. (IMI) uses the capital market line to make asset allocation recommendations. IMI derives the following forecasts:∙ Expected return on the market portfolio: 12%. ∙ Standard deviation on the market portfolio: 20%∙ Risk-free rate: 5%Samuel Johnson seeks IMI’s advice for a portfolio asset allocation. Johnson informs IMI that he wants the standard deviation of the portfolio to equal half of the standard deviation for the market portfolio. Using the capital market line, what expected return can IMI provide subject to Johnson’s risk constraint?
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.
Investment Management Inc. (IMI) uses the capital market line to make asset allocation recommendations. IMI derives the following
∙ Expected return on the market portfolio: 12%. ∙ Standard deviation on the market portfolio: 20%
∙ Risk-free rate: 5%
Samuel Johnson seeks IMI’s advice for a portfolio asset allocation. Johnson informs IMI that he wants the standard deviation of the portfolio to equal half of the standard deviation for the
market portfolio. Using the capital market line, what expected return can IMI provide subject to Johnson’s risk constraint?
Trending now
This is a popular solution!
Step by step
Solved in 5 steps with 2 images
