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You currently own $100,000 worth of Wal-Mart stock
You currently own $100,000 worth of Wal-Mart stock. Suppose that Wal-Mart has an expected return of 14% and a volatility of 23%. The market portfolio has an expected return of 12% and a volatility of 16%. The risk-free rate is 5%. Assuming the CAPM assumptions hold, what alternative investment has the highest possible expected return while having the same volatility as wal-mart? what is the expected return of this portfolio?
Expert Solution
Weight of market portfolio=Required volatility/Market volatility=23%/16%=1.4375
Weight of risk free asset=1-weight of market portfolio=1-1.4375=-0.4375
Borrow 0.4375 at risk free and invest 1.4375 in market portfolio
Expected return=1.4375*12%+(1-1.4375)*5%=15.0625%
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