CMA Final · Strategic Financial Management · Portfolio Theory and Practice
The market portfolio has an expected return of 14% and a standard deviation of 20%. The risk-free rate is 6%. Using the Capital Market Line, what expected return should an efficient portfolio with a standard deviation of 30% offer?
The efficient portfolio should offer 18%. The Capital Market Line has a slope of 8/20, or 0.4 per unit of risk, so a 30% standard deviation adds 12% to the 6% risk-free rate. Multiplying 14% by 1.5 ignores the cost of borrowing.
- A18%Correct
- B21%
- C15%
- D20%
Explanation
CML slope = (14 − 6)/20 = 0.4. Expected return = 6 + 0.4 × 30 = 18%. This means 150% in the market financed by borrowing 50% at 6%. The 21% figure wrongly applies 1.5 to the market return alone and ignores borrowing cost.
Did you get it right without looking?
One question tells you little. A timed set on Portfolio Theory and Practice shows your real accuracy, how long you take and where you lose marks.
More Portfolio Theory and Practice questions
- A portfolio has 50% in Asset P (expected return 12%, SD 15%) and 50% in Asset Q (expected return 8%, SD 25%). Correlation is zero. What is t…
- A portfolio has weights of 40% in Stock M and 60% in Stock N. The standard deviations are 20% for M and 30% for N, and the correlation betwe…
- An investor holds three securities in a portfolio with weights and expected returns as follows: Security P (40%, 12%), Security Q (35%, 15%)…
- A portfolio has three securities with weights 50%, 30% and 20% and betas 1.2, 0.8 and 1.5 respectively. The risk-free rate is 7% and the mar…
- Two securities have standard deviations of 12% and 18%. Their covariance is -0.0108 (that is, -108 in %-squared terms). What is the correlat…
- Security P has a standard deviation of 20% and Security Q has a standard deviation of 10%. The correlation between them is -1. What proporti…