Investors maximize expected return subject not to exceeding the maximum variance of their portfolio they are willing to tolerate.

a) There are 2 assets available:

Asset 1 / Asset 2

Expected return 4% / 40%

Standard deviation 0 / 20%

 Compute the capital market line. 

b) There are 2 assets available:

Asset 3 Asset 4

Expected return 5% 25%

Standard deviation 0 15%

Compute the capital market line.

c) You, as an investor, decide that the maximum standard deviation you can tolerate is 10%. Would you prefer to have access to Assets 1 and 2 OR to Assets 3 and 4? explain your answer.

Answer rating: 100% (QA)

a To compute the capital market line for Assets 1 and 2 Lets assume the riskfree rate is 2 not provi... View the full answer