September 2021

Hi,

In question 5, part (i), why do we not include the risk free asset when calculating the return on the market portfolio?

Thanks

 

Hi -grateful if you can answer my query on the same question (Sep 2021, Paper A, Q5(i)):

The 2nd line of the Examiner Report solution (bottom pg5) says: x – 3% = 2(RM – 3%) => x = 2*RM – 3%

What does RM represent here and where does this formula come from? [Guess RM must be different from R_M which is used elsewhere in the solution to refer to the 'Return on the market portfolio'

Thanks in advance (and enjoy a well-deserved CM2 break after this week

 

Actually i've just realised that:

1) RM must just be the same as R_M (which is the same as EM = the expected return on market portfolio, and also confusingly used in the solution) and
2) solution is using the formula for an expected return on individual asset, in this case: R_c - risk-free rate = Beta_c * (RM- risk-free rate)

So just ignore previous post (except the bottom line

Although unsure where the Alternative solution for this part came from:
(10% - 3%) / (EM – 3%) = 1
=> RM = 10%