While portfolio Z has a return of 15% with a standard deviation of 40%, the market portfolio has a 10% return and 10% standard deviation. Given a 5% annual risk-free rate, what is the percentage of portfolio Z will be included in the M² hypothetical portfolio? A) Undetermined B) 10% C) 30% D) 75% E) 25%

Question

Quizplus · Accepted Answer

The percentage of portfolio Z included in the hypothetical portfolio can be determined using the Sharpe ratio. The Sharpe ratio is calculated as (Return of Portfolio - Risk-Free Rate) / Standard Deviation of Portfolio. The portfolio with the highest Sharpe ratio is more desirable. However, in this context, the question seems to be asking about the construction of an optimal portfolio combining the market portfolio and portfolio Z, possibly hinting at the Capital Allocation Line (CAL) where portfolios are mixed to achieve a desired risk-return profile. Without specific formulas or additional context provided in the question, such as the exact method to calculate the percentage (e.g., through the use of the Capital Market Line or another specific model), the answer cannot be directly calculated from the information given. However, given the choices provided and assuming the question implies a calculation based on the Sharpe ratio or a similar concept, the answer provided seems to be an estimation or requires additional information not provided in the question. Therefore, the correct response based on standard financial theories and the information given would typically be "Undetermined," but since the explanation is based on the assumption of missing calculation details or context, the chosen answer "E" suggests there might be a specific context or formula assumed in the question that is not explicitly stated.

While Portfolio Z Has a Return of 15% with a Standard