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:

Internal Rate

Internal rate usually refers to the internal rate of return (IRR), a financial metric used to assess the profitability of investments by calculating the interest rate that makes the net present value (NPV) of all cash flows from a particular project or investment equal to zero.

Accept

In financial terms, it often refers to a bank's agreement to honor a draft or other financial instrument payable at a future date.

Net Present Value

The difference between the present value of cash inflows and outflows over a period of time, used in capital budgeting to assess profitability of investments.

Initial Investment

The amount of money used to start a new venture, purchase an asset, or stock in a portfolio, serving as the foundation for future financial performance and returns.