Use the Information for the Question(s)below

question 70

Essay

Use the information for the question(s)below.
Tom's portfolio consists solely of an investment in Merck stock.Merck has an expected return of 13% and a volatility of 25%.The market portfolio has an expected return of 12% and a volatility of 18%.The risk-free rate is 4%.Assume that the CAPM assumptions hold in the market.
-You currently own $100,000 worth of Wal-Mart stock.Suppose that Wal-Mart has an expected return of 14% and a volatility of 23%.The market portfolio has an expected return of 12% and a volatility of 16%.The risk-free rate is 5%.Assuming the CAPM assumptions hold,what alternative investment has the highest possible expected return while having the same volatility as Wal-Mart? What is the expected return of this portfolio?

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Definitions:

Barriers to Entry

Obstacles that make it difficult for new competitors to enter a market.

Oligopoly

A market structure characterized by a small number of firms whose decisions about production and pricing significantly affect the market.

Herfindahl Index

A measure of market concentration that sums the squares of the market share percentages of all firms within the industry, used to assess the level of competition.

Oligopolistic

Pertains to a market structure characterized by a small number of firms dominating the market, leading to limited competition and significant control over market prices.