Using the formula for the capital market line (Formula 21-5), if the risk-free rate (R_F) is 6%, the market rate of return (K_M) is 12%, the market standard deviation (σ_M) is 11%, and the standard deviation of the portfolio (σ_P) is 14%, compute the anticipated return of the portfolio (K_P). A)20.4% B)16.33% C)13.64% D)13.4% E)13.2%

Question

Quizplus · Accepted Answer

The formula for the capital market line is:
KS1U1B1P = RS1U1B1F + [(KS1U1B1M - RS1U1B1F) / σS1U1B1M] × σS1U1B1P

Substituting the given values, we get:
KS1U1B1P = 6% + [(12% - 6%) / 11%] × 14%
KS1U1B1P = 6% + (0.5455) × 14%
KS1U1B1P = 6% + 7.636%
KS1U1B1P = 13.64%

Therefore, the anticipated return of the portfolio is 13.64%. The correct answer is (C).

Using the Formula for the Capital Market Line (Formula 21-5)