You are evaluating various investment opportunities currently available and you have calculated expected returns and standard deviations for five different well-diversified portfolios of risky assets:
Portfolio Expected return Standard deviation
Q 7.8% 10.5%
R 10 14
S 4.6 5
T 11.7 18.5
U 6.2 7.5
a. For each portfolio, calculate the risk premium per unit of risk that you expect to receive ([E(R)-RFR]/σ). Assume that the risk-free rate is 3.0%.
b. Using your computations in part a, explain which of these five portfolios is most likely to be the market portfolio. Use your calculations to draw the capital market line (CML).
c. If you are only willing to make an investment with σ=7%, is it possible for you to earn a return of 7%.