The Efficient Frontier and CAPM:

2. Supposethat: =5%, ( )=12%and =0.18

a.What is the risk premium in the market?

b.Present the CML equation (use for the standard deviation of the portfolio).

c.What will be the expected return that investors demand in order to invest in a portfolio with standard deviation of 12%? What should the expected return be if the standard deviation of the portfolio is 25%?

5.The market portfolio has an expected return of 8% and a SD of 10%. The risk free rate in the market is 5%. Consider the following two efficient investors: Lionel and Cristiano. You know that the expected return in Lionels portfolio is 6%, and the Standard Deviation in Cristianos portfolio is 12%

a. Calculate Lionels and Cristianos investment weight (proportion) in the market out of their portfolio.

b. Jose (another investor) decided to invest all of its money in one stock. The expected return of the stock is 15% and the standard deviation of the stock is 60%. Can he improve his portfolio? Specifically, how should Jose construct his portfolio?

c. Following b, if he still wants the same standard deviation, what will be his expected return?

6.The following table presents data of four portfolios, traded in a CAPM model market:

Expected return

Standard Deviation

Beta

Specific variance

Portfolio 1 Portfolio 2 Portfolio 3 Portfolio 4

8% 10% 12% ? ? 0 2 0.49 10 0 0.36? ? 5% ?

Using the given information, please complete the missing data in the table.