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The expected return of stock A is 21% per year and the stock's annual standard deviation...

The expected return of stock A is 21% per year and the stock's annual standard deviation is 46%. There is also a risk-free asset. When a complete portfolio is formed with a portfolio weight on the risky asset of 36%, the expected return on the complete portfolio is 8.0%.

1. Compute the risk-free rate of return.

2. Compute the annual standard deviation of the complete portfolio above.

3. Compute the market price of risk using the Sharpe ratio?

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Answer #1

risk free rate = (return on complete portfolio - (w1*r2))/w2

where , w1 = weight of stock A in portfolio

w2 = weight of risk free asset in portfolio

r2 = expected return on stock A

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