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CMA Final · Strategic Financial Management · Asset Pricing Theories

The risk-free rate is 6%. The market portfolio has an expected return of 14% and a standard deviation of 20%. According to the Capital Market Line, what return should an efficient portfolio with a standard deviation of 15% offer?

The efficient portfolio should offer 12%. The CML slope is the market risk premium of 8% divided by the market standard deviation of 20%, which is 0.40. Adding 0.40 × 15% = 6% to the 6% risk-free rate gives 12%.

  1. A12.0%Correct
  2. B10.5%
  3. C16.5%
  4. D9.0%

Explanation

CML slope = (14 − 6)/20 = 0.40 per unit of risk. Expected return = 6 + 0.40 × 15 = 12%. Taking 75% of the market return (10.5%) ignores the risk-free component.

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