# Question: Your investment portfolio consists of 15 000 invested in only one

Your investment portfolio consists of $15,000 invested in only one stock—Microsoft. Suppose the risk-free rate is 5%, Microsoft stock has an expected return of 12% and a volatility of 40%, and the market portfolio has an expected return of 10% and a volatility of 18%. Under the CAPM assumptions,

a. What alternative investment has the lowest possible volatility while having the same expected return as Microsoft? What is the volatility of this investment?

b. What investment has the highest possible expected return while having the same volatility as Microsoft? What is the expected return of this investment?

a. What alternative investment has the lowest possible volatility while having the same expected return as Microsoft? What is the volatility of this investment?

b. What investment has the highest possible expected return while having the same volatility as Microsoft? What is the expected return of this investment?

## Answer to relevant Questions

What is the risk premium of a zero-beta stock? Does this mean you can lower the volatility of a portfolio without changing the expected return by substituting out any zero-beta stock in a portfolio and replacing it with the ...In mid-2009, Rite Aid had CCC-rated, 6-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity Treasuries had a yield of 3%. Suppose the market risk premium is 5% and you believe Rite Aid’s ...Harrison Holdings, Inc. (HHI) is publicly traded, with a current share price of $32 per share. HHI has 20 million shares outstanding, as well as $64 million in debt. The founder of HHI, Harry Harrison, made his fortune in ...In Problem 19, assume the risk-free rate is 3% and the market risk premium is 7%.a. What does the CAPM predict the expected return for each stock should be?b. Clearly, the CAPM predictions are not equal to the actual ...Consider the entrepreneur described in Section 14.1 (and referenced in Tables 14.1–14.3). Suppose she funds the project by borrowing $750 rather than $500.a. According to MM Proposition I, what is the value of the equity? ...Post your question