Use the Information for the Question(s)below

question 116

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 lowest possible volatility while having the same expected return as Wal-Mart? What is the volatility of this portfolio?

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Definitions:

Straight-line

A method of depreciation that allocates an equal expense rate to each year of an asset’s useful life.

Accelerated Methods

Depreciation methods that allocate more depreciation expense to the earlier years of an asset's life.

Depreciation

Strategically spreading out the cost of a tangible asset throughout its period of usefulness.

Accounting Estimate

An approximation of a financial transaction's value when precise measurement is not possible, often used in accrual accounting.