The expected return on the market is 12.5% with a standard deviation of 25%.The risk-free rate is 5.5%.What is the expected return on an efficient portfolio with a standard deviation of 30%?
A)4.10%
B)11.33%
C)13.90%
D)28.90%

Question

Quizplus · Accepted Answer

The expected return on an efficient portfolio can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). However, without the beta of the portfolio, we use the concept of the Sharpe ratio, which is the return per unit of risk above the risk-free rate. Assuming the market portfolio is efficient, its Sharpe ratio would be (12.5% - 5.5%) / 25% = 0.28. Applying the same Sharpe ratio to the portfolio in question, the excess return over the risk-free rate would be 0.28 * 30% = 8.4%. Adding the risk-free rate back, the expected return is 5.5% + 8.4% = 13.9%.

The Expected Return on the Market Is 12