A portfolio with 35% weight in Investment A, and 65% weight in Investment B will have a standard deviation of returns equal to zero. - Investment A has an expected return of 8% - Investment B has a standard deviation of returns of 7.1% and a covariance with the market of 0.0029. - Risk-free rate is 5% and the market risk premium is 7% If no arbitrage opportunities are available, the expected return on the combined portfolio is closet to: a. 5% b. 6% c. 7% d. 8%
Beta = Cov/Variance = .0029/.142 = .0204 E® = .05 + .0204(.07) = .051 (.35 x .08) + (.65 x .051) = .061
but market variance is not given, how did you get 0.142 ??
beta of A, betaA=0.42, but there is no information on Cov(A,M) … something is missing ?
I thought the answer was 6% as well, but the answer key says that it is 5%?? This is from Schweser book 6 exam 3, morning # 114.
Here’s the explanation from Schweser: If the no-arbitrage condition is met, a riskless portfolio (a portfolio with zero standard deviation of returns) will yield the risk-free rate of return.
“No arbitrage opportunities are available” is the key —> a portfolio with zero SD will give same yield as Risk Free Rate … I got this question right when I was doing Book 6, looks like time to do some revision
thanks - that makes sense!