CFM_Problem_Set6 - Problem Set 6 Corporate Financial Management Autumn Term 2016 1 Capital Market Line(CML The market portfolio has an expected return

CFM_Problem_Set6 - Problem Set 6 Corporate Financial...

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Corporate Financial Management Problem Set 6 Autumn Term 2016 1 1. Capital Market Line (CML) The market portfolio has an expected return of 12% and a standard deviation of 10%. The risk-free rate is 5%. a) What is the expected return on a well-diversified portfolio with a standard deviation of 7%? b) What is the standard deviation of a well-diversified portfolio with an expected return of 20%? 2. Portfolio Theory and CAPM Your investment portfolio consists of £30,000 invested in only one stock Alpha. Suppose the risk-free rate is 2%, Alpha stock has an expected return of 15% and a volatility of 30%, the expected market risk premium is 8% and the market portfolio has a volatility of 16%. Under the CAPM assumptions, (i) What alternative investment has the lowest possible volatility while having the same expected return as Alpha? What is the volatility of this investment?
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