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Consider a complete portfolio C
Consider a complete portfolio C. invested in a risky portfolio, P. and a risk-free asset with the following characterisitos: • Risky portfolio, P: E(rp) = 13% and op = 11% Risk-free asset: r; = 5% • w: Weight in a risky portfolio P What is the expected return of the complete portfolio when w = 0.6? (Use % as a unit. Answer to the first decimal place, e.g. 58.0.)
What is the intercept of the CAL of P? (Use % as a unit. Answer to the first decimal place, e.g. 58.0.)
What is the slope of the CAL of P if w
Expert Solution
The portfolio’s expected return is a weighted average of its individual assets’ expected returns, and is calculated as:
E(Rp) = w1E(R1) + w2E(R2)
1. Expected Return = 0.6(13%) + 0.4(5%)
Expected Return = 7.8% + 2%
Expected Return = 9.8%
2. Slope of the portfolio is Sharpe Ratio
Sharpe Ratio = (Rx – Rf) / StdDev Rx
Where:
- Rx = Expected portfolio return
- Rf = Risk-free rate of return
- StdDev Rx = Standard deviation of portfolio return (or, volatility)
Sharpe Ratio of CAL at P (Risky Portfolio) = 13% - 0%/11%
Sharpe Ratio of CAL at P (Risky Portfolio) = 1.18
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