ABC. Ltd. has a risk free asset yielding 0.02. During this period expected return of 0.09 and a standard deviation of 0.04 are based on past data of the market portfolio. The risk premium 0.07 is considered to be constan

CS Executive · Financial and Strategic Management · PYQS · June 2019
ABC. Ltd. has a risk free asset yielding 0.02. During this period expected return of 0.09 and a standard deviation of 0.04 are based on past data of the market portfolio. The risk premium 0.07 is considered to be constant throughout the period. A security has a coefficient of correlation with market portfolio of 0.75 and standard deviation is 0.08. The expected standard deviation of market portfolio is now 0.04. On the basis of the given data, find out: (i) Market's risk return trade-off;

Answer & Explanation:

(i) Market's risk return trade-off: Market's risk return trade-off = (R m - R f ) ÷ σ m Where, R m = Market Return = 0.09 R f = Risk free rate of Return = 0.02 σ m = Standard deviation of market = 0.04 Market's risk return trade-off = (0.09 - 0.02) ÷ 0.04 = 0.07 ÷ 0.04 = 1.75

Topics: Financial Management

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