Question

You are holding a portfolio of stocks where the beta of your portfolio is 2.5 and its correlation with "M", the market portfolio, is.4. The risk-free rate is 6%, the expected return on the market portfolio is 12%, and the standard deviation of the return on the market portfolio is 20%. How much additional expected return could you achieve, at no increase in risk (standard deviation), by making your portfolio efficient?

Answer 1

Given,

Beta of portfolio = 2.5

Correlation with market portfolio = 0.4

Risk free rate = 6% or 0.06

Expected return on market portfolio = 12% or 0.12

Standard deviation of return on market portfolio = 20% or 0.20

Solution :-

Thus, you could achieve additional expected return of 22.50% by making your portfolio efficient.