Question

# The standard deviation of Asset A returns is 36%, while the standard deviation of Asset M...

The standard deviation of Asset A returns is 36%, while the standard deviation of Asset M returns is 24%. The correlation between Asset A and Asset M returns is 0.4.

(a) The average of Asset A and Asset M’s standard deviations is (36+24)/2 = 30%. Consider a portfolio, P, with 50% of funds in Asset A and 50% of funds in Asset M. Will the standard deviation of portfolio P’s returns be greater than, equal to, or less than 30%? Explain this answer intuitively.

(b) What, specifically, will be the standard deviation of portfolio P returns?

(c) Asset M is in fact the “market” portfolio. What is the Beta coefficient for Asset M? For Asset A? For Portfolio P?

(d) Assume that the CAPM holds, that the risk-free interest rate is 1% and that the expected return on the market is 7.5%. What is the expected return on Asset A? On portfolio P?

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