While portfolio A has a return of 15% with a standard deviation of 40%, the market portfolio has a 10% return and 10% standard deviation. Given a 5% annual risk-free rate, what is the resulting return for this M² hypothetical portfolio? A) Undetermined B) 10% C) 3.75% D) 7.5% E) 2.5%

Question

Quizplus · Accepted Answer

The M² measure adjusts the portfolio's return to the market's risk level. The formula is: M² = Rf + (Rp - Rf) * (σm / σp). Substituting the given values: M² = 5% + (15% - 5%) * (10% / 40%) = 7.5%.

While Portfolio a Has a Return of 15% with a Standard