Expected Return

CFA Level I
#1

An investor wants to achieve a portfolio risk (standard deviation) of 0.037. The expected return on the market portfolio is 0.12 with a standard deviation of 0.1. If the risk free rate is .042, the best expected return the investor can achieve is closest to: A 4.44% B 7.00% C 8.00% D 12.00%

#2

A?

#3

I used the sharpe ration for this one, tricky question though

#4

crap it’s the CML line answer is b

#5

Is this right though? I would like to see another approach to this problem. The official solution to this problem confused me, but I managed to get it right as it is basically an algebra problem. The standard deviation of the portfolio is equal to the percentage of the portfolio invested in the market times the return on the market. STDport = (1 - Wrf) * STDmarket Because the STDmarket is a nice easy 10% you can quckly see that the portfolio is 63% risk free asset. Now you use the following formula to calculate the portfolios expected return. E(Rport) = Wrf * RFR + (1 - Wrf)* E(Rm) equals .63 * .042 + (1 - .63) * .12

#6

I’d compute the Beta for the stock, and use CAPM.

#7

It’s the CML equation which states: Expect return= RFR + std (of portfolio)*(Expected return on market-RFR/std market port) = .042+ 0.037 {(.12-.042)/.1} =7.09 answer is B

#8

getterdone Wrote: ------------------------------------------------------- > crap it’s the CML line > > answer is b luckily in the exam you’d know its CML cuz this will be in portfolio management section.

#9

When I found out how they structure the exam I was so ffffing happy. It makes it alot easier knowing which sections your doing. For me I am able to recall stuff better that way from whats left of my memory!

#10

KJH Wrote: ------------------------------------------------------- > Is this right though? I would like to see another > approach to this problem. > > The official solution to this problem confused me, > but I managed to get it right as it is basically > an algebra problem. > > The standard deviation of the portfolio is equal > to the percentage of the portfolio invested in the > market times the return on the market. > STDport = (1 - Wrf) * STDmarket > > Because the STDmarket is a nice easy 10% you can > quckly see that the portfolio is 63% risk free > asset. > > Now you use the following formula to calculate the > portfolios expected return. > E(Rport) = Wrf * RFR + (1 - Wrf)* E(Rm) equals .63 > * .042 + (1 - .63) * .12 thanks, this one tricked me, too