A portfolio that combines the risk-free asset and the market portfolio have an expected return of 26 percent and a standard deviation of 9 percent. The risk-free rate is 4.6 percent, and the expected return on the market portfolio is 20 percent. Under CAPM what expected rate of return would a security earn if it had a 0.8 correlation with the market portfolio and a standard deviation of 4 percent?
Need help answering these questions:
a. What financial concept or principle is this problem asking you to solve?
b. What are some business decisions that a manager would be able to make after solving the problem?
c. Is there any additional information missing from the problem that would enhance the decision-making process?
d. Without showing mathematical calculations, explain in writing how you would solve the problem.