You are a financial advisor. A client approaches you for advice The client has c

Question

You are a financial advisor. A client approaches you for advice The client has constructed his own portfolio and it has an expected return of 8% per annum and an annual return standard deviation of 10%. You know that the market portfolio has a mean return of 15% per year and a return standard deviation of 20% The annual risk-free rate rs 5%. Demonstrate to the client, using a picture, that he can build an efficient portfolio which has identical return volatility to his current portfolio but which has superior expected return Be sure to explain the shape and position of all of the elements of your picture. Determine the composition of this efficient portfolio and compute its expected return

Explanation / Answer

expected return = risk free rate + risk premium * beta

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