Chapter 11, Problem 31QAP

Summary Introduction

Adequate information:

Expected return on portfolio [E(R_P)] = 9% or 0.09

Standard deviation of the portfolio (σ_P) = 16% or 0.16

Risk-free rate (R_f) = 4.1% or 0.041

Market expected return [E(R_M)] = 11% or 0.11

Security correlation with the market (ρ_L,M) = 0.38

Standard deviation of the security (σ₁) = 60% or 0.60

To compute: Expected rate of return on a security.

Introduction: Expected return on security refers to the yield or return that is anticipated on the security in the future.