Use the following information to answer the question(s)below.
Your investment portfolio consists of $10,000 worth of Google stock.Suppose that the risk-free rate is 4%,Google stock has an expected return of 14% and a volatility of 35%,and the market portfolio has an expected return of 12% and a volatility of 18%.Assume that the CAPM assumptions hold.
-What alternative investment has the lowest possible volatility while having the same expected return as Google?
A)-25% in the risk-free asset and +125% in the market portfolio
B)-20% in the risk-free asset and +120% in the market portfolio
C)0% in the risk-free asset and +100% in the market portfolio
D)20% in the risk-free asset and +80% in the market portfolio

Question

Quizplus · Accepted Answer

To achieve the same expected return as Google (14%) using the CAPM, we need to find a combination of the risk-free asset and the market portfolio. The formula for the expected return of a portfolio is: E(Rp) = w_rf * Rf + w_m * E(Rm). Solving for weights that give E(Rp) = 14%, we find that -25% in the risk-free asset and +125% in the market portfolio achieves this, with the lowest possible volatility.

Use the Following Information to Answer the Question(s)below