Question

You can invest in a risk free asset that yields 3.1% and a market portfolio that yields 9%. the market portfolio has a standard deviation of 8.5%. if you are willing to take on a risk level of 8.5% according to the capital market line, how much can you expect to return on your portfolio? Submit your answer as a percentage

Answer 1

CML Ret = Rf +[ [ SD of Security / SD of Market ] * [ Rm - Rf ] ]
Rf - Risk Free Ret
Rm- Market Ret
Rm - Rf = RiskPremium

Particulars	Values
Risk Free Ret (Rf)	3.10%
Market Ret ( Rm)	9.00%
Risk Premium (Rm - Rf)	5.90%
SD of Security	8.50%
SD of Market	8.50%

It is called as Capital market line. It expected Risk premium for Total Risk. Where in SML, we consider risk premium for Systmatic risk alone.

CML Ret = Rf +[ [ SD of Security / SD of Market ] * [ Rm - Rf ] ]
Rf - Risk Free Ret
Rm- Market Ret
Rm - Rf = RiskPremium
= 3.1 % + [ [ 8.5 % / 8.5 % ] * [ 5.9 % ] ]
= 3.1 % + 5.9 %
= 9 %

Capital market ret is9 %