An investor is seeking an efficient portfolio with a correlation of 0.7 between the portfolio and the market and a standard deviation of 2.5%. The market standard deviation is 1.4% and the market rate of return is 16%, a

Calculation of beta co-efficient: Standard deviation (σ s ) = 2.5% Correlation co-efficient (r m ) = 0.70 Market Standard Deviation (σ m ) = 1.4% Beta Coefficient = (r m × σ s ) ÷ σ m = (0.70 × 2.5) ÷ 1.4 = 1.75 ÷ 1.4 = 1.25 Given: R m = 16% R f = 8% (since market rate of return is double the return on risk-free securities, 16% / 2 = 8%) Required rate of return: Required rate of return = R f + β (R m - R f ) = 8% + 1.25 (16 - 8) = 8% + 1.25 (8) = 8% + 10% = 18%