Assume that the two shares, Share A and Share B, are the only risk-bearing assets available to investors. Assume further that there is a bank that offers an interest rate of 1.51% on invested capital (risk-free) and a lending rate of 4.51%. Share A has an expected return of 13% and a standard deviation of 29.26% and Share B has an expected return of 4% and a standard deviation of 13.90%. As lending and deposit rates are different, CML will no longer take the form of a straight line. Instead, CML consists of three different parts. 

The first part is a straight line that extends from the point of the deposit rate and touches the portfolio front. 

The second part picks up where the first part ends and extends furthest along the portfolio front to the point where a straight line extending from the lending rate touches that portfolio front. 

The third part is a straight line that picks up where the second part ends and has the same slope as a straight line that extends from the lending rate and touches the portfolio front. The key portfolio when you invest part of your capital in the bank has an expected return of 7.90% with a standard deviation of 13.30%. The key portfolio when mortgaging your portfolio has an expected return of 11.35% with a standard deviation of 23.44%.

Calculate the expected return for an optimal portfolio that has a standard deviation of 7.14%.

Answer rating: 100% (QA)

To calculate the expected return for an optimal portfolio with a standard deviation of 714 we need to use the Capital Market Line CML formula However ... View the full answer