The Expected Return for the Market Is 12 Percent, with a Standard

question 63

Essay

The expected return for the market is 12 percent, with a standard deviation of 20 percent. The expected risk-free rate is 8 percent. Information is available for three mutual funds, all assumed to be efficient, as follows:
$\begin{array} { c c c } \underline { \text { Stock } } & \underline { \text { Beta } }& \underline { \mathrm { R } _ { \mathrm { i } } ( \% ) } \\1 & 0.8 & 12 \\2 & 1.2 & 13\\3&0.6&11\end{array}$ (a) Based on the CML, calculate the market price of risk.
(b) Calculate the expected return on each of these portfolios.

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Definitions:

Merchantable Quality

A standard for goods being sold under a contract, ensuring they are of sufficient quality to be sold for their ordinary purpose.

Implied Terms

Provisions not expressly stated in a contract but understood to be included based on the nature of the agreement, legal requirements, or customary practice.

Breach of Condition

A violation of a specific condition set in a contract, which can lead to the termination of the agreement.

Faulty Design

A design that fails to meet required specifications or standards, resulting in a product or structure that is unsafe, does not perform as intended, or is not fit for its intended use.