combination of a risk-free asset and a single portfolio of risky assets: the tangency portfolio. Assume the risk-free rate is 4%. You are a financial advisor and must choose one of the funds below. Your clients will combine it with the risk-free asset.What fund would you recommend?QuestionSuppose that the market portfolio has an expected return of 17% and a volatility of 12%. The risk-free rate is 5%. You would like to maximize your expected return without bearing a standard deviation larger than 10%.●If CAPM holds, what is the maximum expected return that you may earn? 3
Datum: Finance 1 SU HT 2017 Metod 2 1.Räkna ut Beta (formelblad)2.Räkna ut sharpe ratio = 13.Ta reda på expect return med 10 %, samma formel som sharpe ratio, men exp. Return som x. Market portfolio = tangency portfolioCAPM in practice: ExampleSpin Industries is seeking to raise capital from a large group of investors to fund a new project. Suppose that the market portfolio has an expected return of 14% and a volatility of 20%. The new project is expected to have a volatility of 40% and a correlation with the efficient portfolio of 0.7. The risk-free rate is 4%.●What is the required return for the new project?CAPM again: Example●Suppose you group all the stocks in the world into two mutually exclusive portfolios (each stock is in only one portfolio) that have equal size (in terms of total value) so that the market portfolio is a 50-50 combination of the two portfolios. Suppose that the correlation between the return of those two portfolios is 0.5, and that they have the following characteristics.●The risk-free rate is 4%.●What is the expected return and volatility of the market portfolio?Calculate the Sharpe ratios of the value stock, growth stock and market portfolios? 4
Datum: Finance 1 SU HT 2017
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