Skip to content

CMA Final · Strategic Financial Management · Asset Pricing Theories

The risk-free rate is 8%. The market portfolio has expected return 14% and standard deviation 12%. Under the Capital Market Line, an investor wants a portfolio with a standard deviation of 18% by borrowing at the risk-free rate. The expected return of this portfolio and the proportion invested in the market portfolio are respectively:

The expected return is 17% with 150% invested in the market. A standard deviation of 18% is 1.5 times the market's 12%, so the investor borrows 50% at 8%. Return is 1.5 x 14% minus 0.5 x 8%, which equals 17%.

  1. A17% and 150%Correct
  2. B20% and 150%
  3. C17% and 133%
  4. D23% and 150%

Explanation

Weight in market = 18/12 = 1.5 (150%), meaning 50% is borrowed. Return = 8% + (14%-8%)/12% x 18% = 8% + 9% = 17%. Check: 1.5 x 14% + (-0.5) x 8% = 21% - 4% = 17%. 20% or 23% come from mis-stating the slope or adding 9% twice.

Did you get it right without looking?

One question tells you little. A timed set on Asset Pricing Theories shows your real accuracy, how long you take and where you lose marks.

Practise Asset Pricing TheoriesFree diagnostic mock

More Asset Pricing Theories questions