Question

assume that risk free rate of return is7 percent . the market portfolio has an expected return of 14 percent and standard deviation of retunes of 25 percent . under equilibrium conditions as described by CAPM what would be the expected return for a portfolio having no unsystematic risk and 20 percent standers deviation of the return

Answer 1

Answer:

by Patrick Lynch

01 May 2004

In the article on portfolio theory, we saw that the motivation behind the establishment of a portfolio is that risk (the bad) can be reduced without a consequential reduction in return (the good). This was mathematically evident when the portfolios' expected return was equal to the weighted average of the expected returns on the individual investments, while the portfolio risk was normally less than the weighted average of the risk of the individual investments.