Aasir can invest his money in risk-free asset and/or in a stock S. The risk- free asset provides a guaranteed return of 4%. The stock S provides expected return of 12% with volatility of 50%. If Aasir wants to limit his standard deviation to no more than 30%, what is the highest expected return he can earn? If Aasir wants an expected return of at least 15%, what is the minimum possible volatility of his portfolio? Assume Aasir can short any asset and can invest more than 100% in any asset.

Problem 6.6. In each of the following cases, given a property about a security S, specify whether it means that the security lies above or below or on CML (Capital Market Line) when its expected return is plotted against its standard deviation or the security lies above or below or on SML (Security Market Line) when its expected return is plotted against its beta. That is, in each case, answer one of the following:

Above CML Below CML On CML

Above SML Below SML On SML

1. S is underpriced

1. S has idiosyncratic risk

1. Expected return of S is less than required return

1. S has the highest Sharpe ratio possible

1. 
   

1. S is well-diversified

Answer rating: 100% (QA)

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