A small economy, the market portfolio's expected return is 9.43% and volatility is 10.63%, furthermore, the risk-free interest rate is 2.59%. The two shares A and B that are traded on this market have beta values of 0.58 and 1.58, respectively.

Calculate expected return according to CAPM and beta value for a portfolio that consists of 50 % of the risk-free asset, 29% of shares in A and 21% of shares in B? Illustrate SML and place the portfolio, the market portfolio and the two stocks. 

Assume that the CAPM holds and that stock A has a standard deviation of 10%, stock B has one standard deviation of 20% and that stock A and stock B have a correlation of 0.09. 

Give one graphical argument for whether it is a good idea to invest in a portfolio that consists of 50 % of the risk-free asset, 29% of shares in A and 21% of shares in B? 

Answer rating: 100% (QA)

To calculate the expected return of the portfolio using the Capital Asset Pricing Model CAPM we can use the following formula Expected Return RiskFree ... View the full answer