You manage a risky portfolio with an expected rate of return of 18% and a standard deviation of 28%. The T-bill rate is 8%. CAPM holds.
a. Draw the CML line. What is its slope? Show the position of your client and the market portfolio.
b. Suppose that your client prefers to invest in the market a proportion y that maximizes the expected return on the complete portfolio subject to the constraint that the complete portfolio's standard deviation will not exceed 18%. What is the investment proportion in the market portfolio? What is the expected rate of return on the complete portfolio?
c. Suppose that your client decides to invest in the market a proportion y of the total investment budget so that the overall portfolio will have an expected rate of return of 16%. What is the proportion the client invests in the market portfolio and what is your client's portfolio standard deviation?