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April 2012 Q2 CAPM

R

r_v.s

Member
1. Would you please explain why the portfolio equally weighted in all the risky assets and the risk free one doesnot lie on the CML?
In the examiner's report, it says the portfolio should be a linear combination of the market portfolio and risk free asset.

The market portfolio in this case should consist of the five risky assets only.
Em was 9%.
Risk free rate of return was given to be 1%.

The portfolio equally weighted in all the 5 assets and risk free asset would have expected return of 7.3333%

Would this not be a linear combination of the market portfolio and risk free asset? Can we not find a suitable 'a' for Ep = a*Em + (1-a)rf.
I think that would work out to a =79.1667%
 
The Capital Market Line is the straight line denoting the efficient frontier in expected return-standard deviation space.

As, this is a straight line passing through the risk-free asset and the market portfolio, so the risky part of all efficient portfolios must comprise risky assets in the same proportions as in the market portfolio.

Since this is not the case for Portfolio P, this portfolio cannot lie on the Capital Market Line.
 
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