3. A market portfolio with expected return 12% and volatility 25%. The risk-free rate is 7%. Another asset X with expect

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3 A Market Portfolio With Expected Return 12 And Volatility 25 The Risk Free Rate Is 7 Another Asset X With Expect 1 (51.27 KiB) Viewed 54 times

3. A market portfolio with expected return 12% and volatility 25%. The risk-free rate is 7%. Another asset X with expected return 15% with volatility 50% is available on the market. (a) (2 points) Draw the CML and locate asset M and X. (b) (2 points) Use the market portfolio and the risk-free asset to construct a portfolio, such that the expected return replicates asset X. Assume one can freely borrow and lend at risk-free rate. (c) (3 points) If the risk-free borrowing rate is 10% instead, with the same risk-free lending rate 7%, draw the new CML and locate X again. How much do you need to borrow from the risk-free rate to reach a portfolio with the same expected return as asset X?