Question 14

5 Points

23	B	C	D
24	Financial Managers Inc., uses the capital market line to make asset allocation recommendations.
25	They have the following forecasts:
26	Expected Return on the S&P	12.00%
27	SD on the S&P	20.00%
28	Risk Free Return (rf)	5.00%
29
30	A client seeks advice for a portfolio asset allocation.
31	The client informs FMI that the standard deviation of the portfolio should be equal
32	to half of the standard deviation of the S&P.
33
34	Remember that the CML is a linear model.
35	It represents a line that incorporates both the risk free rate of return along with risky asset returns.
36	The risk free return is the y-intercept as its risk is zero.
37	The slope of the line represents the Risk Premium relative to the Market Standard Deviation or volatility.
38	The slope of the line is actually the Sharpe Ratio!
39	Adapt the Sharpe ratio to this calculation.
40
41	What is the Expected Return for the client's portfolio where the standard deviation is half of the SD of the S&P?
42	First, calculate the Sharpe Ratio.
43	Sharpe Ratio	(E(rm) - rf) / SDm
44	Second, Calculate the Revised E(rp)	E(rp) = rf + Sharpe Ratio*(SDp*.5)

9.50%

8.50%

7.50%

5.80%