Suppose that optimal risky portfolio has an expected return of 16% and a variance of 0.04. The risk-free rate is 4%. a) Find the slope of Capital Market Line (Optimal Capital Allocation Line)? b) What is the expected return of a portfolio C, which is on Capital Market Line and has a standard deviation of 0.08?
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.
Suppose that optimal risky portfolio has an expected return of 16% and a variance
of 0.04. The risk-free rate is 4%.
a) Find the slope of Capital Market Line (Optimal Capital Allocation Line)?
b) What is the expected return of a portfolio C, which is on Capital Market Line and has a
standard deviation of 0.08?
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