Problem:
A portfolio that combines the risk-free asset and the market portfolio has an expected return of 9 percent and a standard deviation of 13 percent. The risk-free rate is 5 percent, and the expected return on the market portfolio is 12 percent. Assume the capital asset pricing model holds.
Required:
Question: What expected rate of return would a security earn if it had a .45 correlation with the market portfolio and a standard deviation of 40 percent?
Note: Show supporting computations in good form.