The reward to variability ratio for Portfolio A is better than that of the

The reward to variability ratio for portfolio a is

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The reward-to-variability ratio for Portfolio A is better than that of the market. This scenario is impossible according to the CAPM because the CAPM predicts that the market is the most efficient portfolio. Using the numbers supplied: 𝐒𝐥??𝐞 𝐀 = ??% − ??% ??% = ?. ?, 𝐒𝐥??𝐞 𝐌 = ?𝟖% − ??% ??% = ?. ?? c. Portfolio Expected Return Standard Deviation Risk-free 10% Market 18% 24% A 20% 22% Not possible. Portfolio A clearly dominates the market portfolio. Portfolio A has both a lower standard deviation and a higher expected return.
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Tutorial 6 Tutorial 6 d. Portfolio Expected Return Beta Risk-free 10% Market 18% 1.0 A 16% 1.5 Not possible. The SML for this scenario is: E(R) = 10% + β × (18 % 10%) Portfolios with beta equal to 1.5 has an expected return based on CAPM suggestion equals to: E(R) = 10% + [1.5 × (18% 10%)] = 22% The actual expected return for Portfolio A is 16%; that is, Portfolio A plots below the SML ( A = 6%), and hence, is an overpriced portfolio. This is inconsistent with the CAPM. e. Portfolio Expected Return Beta Risk-free 10% Market 18% 1.0 A 16% 0.9 Not possible. Here, Portfolio A’s expected return based on CAPM is: 10% + 0.9 ×(18% - 8%) = 17.2% This is greater than 16% actual expected return. Portfolio A is overpriced with a negative alpha: A = 1.2% f. Portfolio Expected Return Standard Deviation Risk-free 10% Market 18% 24% A 16% 22% Possible. Portfolio A plots below the CML, as any asset is expected to. This scenario is consistent with the CAPM.
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