Superstar is a limited company whose only asset is a fully diversified stock portfolio with a beta of 1. CAPM applies with risk-free borrowing and lending available to all investors at 5%. The market risk premium is 15%. The expected return of Cautious Carl's portfolio is only 8%, whereas that of Anne Aggressive's portfolio is 35%. The funny thing is that the only risky investment both hold is stocks of Superstar.

Anne teases Carl about his tiny return but shows and explains how and why their portfolio's expected returns differ.

Answer rating: 100% (QA)

To attempt this question lets compute the expected returns for each person using the ... View the full answer