E$($RA$)=5\mathrm{.}70\%,\backslash$sigma A $=5\mathrm{.}06\%,$ E$($RM$)=3\mathrm{.}80\%,\backslash$sigma M $=3\mathrm{.}89\%$; $\backslash$sigma A$,$M $=18\mathrm{.}34($or $0\mathrm{.}001834.$ In order to correctly do this part, you will need to first study the Word file on portfolio theory, CML$,$ and SML$.$

The following is a probability distribution for returns on securities A and M:

State Probability RA RM

$110\%15\%12\%$

$240\%8\%6\%$

$340\%4\%1\%$

$410\%-6\%-2\%$

Assume that security M is actually the market portfolio. Assume that the risk$-$free rate, RF is $2\mathrm{.}60\%.$ Assume an investor divides his available investable capital of $$200,000$ between F and M such that $$50,000$ is in F and the rest is in M$.$

Using the portfolio return equation, calculate the expected return on the combined portfolio, C thus formed. $($Don$\text{'}$t use the CML equation yet.$)$

$3\mathrm{.}50\%$

$3\mathrm{.}20\%$

$6\mathrm{.}40\%$

$2\mathrm{.}90\%$

$1$ points

QUESTION $2$

Use the portfolio risk equation, calculate the standard deviation of portfolio, C formed in part a $($again no CML yet$).$

$3\mathrm{.}89\%$

$4\mathrm{.}48\%$

$2\mathrm{.}92\%$

$4\mathrm{.}18\%$

$1$ points

QUESTION $3$

Now, use the CML relationship and assume that your answer to question $1$ above $3\mathrm{.}96\%$ and to question $02$ is $4\mathrm{.}40\%,$ calculate the required rate of return on the combined portfolio, C$.$

$4\mathrm{.}30\%$

$4\mathrm{.}09\%$

$7\mathrm{.}10\%$

$3\mathrm{.}96\%$

$1$ points

QUESTION $4$

If you calculate the expected return on C using the portfolio equation as we did in question $01$ and then using the CML as we did in question $03,$ we should have $...$

The first should be higher than the second because of diversification effect

The two are equal since the two models are compatible with one another

The first should be lower than the second because of diversification effect

The first should be either higher or lower depending on the parameters of each