Stock A $6,815 61.

87%
Stock B $4,200 38.13%
Total $11,015
E(R) 10.06%
E(R) 12.60%
E(R) 10.85% The weight of Stock X 0.3261
Investment in X $3,260.87
Investment in Y $6,739.13
$10,000.00
 Rate of Return if
State of Probability of State Occurs
Stock A Stock B
Economy
Recession 0.15 0.04 -0.17

Normal 0.55 0.09 0.12

Boom 0.30 0.17 0.27
E(R)_A 10.65%
E(R)_B 12.15%
sigma** 0.00202 0.01936
sigma 4.50% 13.92%
State of Economy Probability Rate of Return if State Occurs
Depression 0.15 -0.184
Recession 0.30 0.029
Normal 0.45 0.173
Boom 0.10 0.372
E(R) 9.62%
sigma** 0.02339
sigma 15.29%
E(R) 10.80%
 Rate of Return if State Occ a. b.
State of urs
Probability of Stock A Stock B Stock C 𝑅_𝑃 E𝑅_𝑃
( ) 𝑅_𝑃 E𝑅_𝑃
( ) σ_𝑃^
Economy 2
Boom 0.75 0.07 0.18 0.27 17.33% 11.58% 21.20% 12.95% 0.020419
Bust 0.25 0.12 -0.08 -0.21 -5.67% -11.80%
State of
Probability of Rate of Return if State Occurs
Economy a. b.
Stock A Stock B Stock C 𝑅_𝑃 E𝑅_𝑃
( ) σ_𝑃^ σ_𝑃
Boom 0.15 0.35 0.40 0.28 2
34.9% 10.26% 0.0180911 13.45%
Good 0.45 0.16 0.17 0.09 14.3%
Poor 0.30 -0.01 -0.03 0.01 -1.2%
Bust 0.10 -0.10 -0.12 -0.09 -10.5%
β_𝑃 1.18
β_𝑃 1.00 β_𝑆 1.39
E𝑅_𝑖
( ) 12.5%
E𝑅_𝑖
( ) 11.40% β_𝑆 1.10
E𝑅_𝑖
( ) 11.85% E𝑅_𝑀
( ) 11.26%
E𝑅_𝑖
( ) 10.45% 𝑅_𝑓 2.8%
a. E𝑅_𝑃
( ) 7.6% 7.6% 𝑋_𝑆 0.7731
b. β_𝑃 0.92 𝑋_𝑅 0.2269
𝑓
𝑋_𝑆
c. E𝑅_𝑃
( ) 10.00% 0.7526
β_𝑃 0.896 𝑋_𝑆 2
d. β_𝑃 2.38
𝑋_𝑅 -1
𝑓
 Portfolio
Percentage of Expected Beta Relationship between portfolio expected return and portfolio
Portfolio in Asset W Return beta

0% 2.60% 0.00
25% 4.15% 0.21

Expected Return
50% 5.70% 0.43 11.90%
f(x) = 0.0729411764705883 x + 0.026 10.35%
75% 7.25% 0.64 8.80%
100% 8.80% 0.85 7.25%
5.70%
125% 10.35% 1.06 4.15%
150% 11.90% 1.28 2.60%

0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.10 1.20 1.30
E 𝑅_𝑊
( ) 8.80%
MRP 0.0729 Beta
 Beta E(R) CAPM risk-free 3.20%
Y 1.2 11.50% 11.36% MRP 6.80%
Z 0.8 8.50% 8.64%
 a.

State of Economy Probability of Stock A Stock B Stock C 𝑅_𝑃 E𝑅_𝑃

( )

Boom 0.25 0.13 0.29 0.60 29% 11.01%

Normal 0.60 0.08 0.11 0.13 10%
Bust 0.15 0.02 -0.18 -0.45 -15%
a. b. c.
Approximate Approximate
σ_𝑃^ σ_𝑃 〖𝑅 expected
The exact real The approximate The exact real
expected real
2 return real risk-free rate risk-free rate
𝑃〗 _ real return risk premium
0.018414 13.57% 𝑖7.31% 7.71% 7.46% 0.40% 0.39% 7.31%
 Exact expected
real risk premium

7.08%
Asset
Investment Beta
Stock A $195,000 0.80
Stock B $365,000 1.09
Stock C $362,723.58 1.23
Risk-free asset $77,276.42 0

β_𝑃 1.00
𝑋_𝑅
7.73%
𝑓
Asset
Investment Expected return Beta
Stock Y ($65,942.03) 7.52% 0.80
Stock X 10.28% 1.20

E (𝑅_𝑃) 12.10%
𝑋_𝑌 -0.65942
 State of Return on Return on
Economy Stock A Stock B

Bear 0.073 -0.094

Normal 0.134 0.142
Bull 0.062 0.321
E (𝑅_𝑖) 8.97% 12.30%
σ_𝑖^ 0.00100 0.02888
2σ_𝑖 3.17% 17.00%
Cov(A,B) -0.000339667
ρ_(𝐴, -0.0631
𝐵)
 Probability
State of Return on Return on
of State of
Economy Stock J Stock K
Economy

Bear 0.30 -0.063 0.140

Normal 0.55 0.109 0.081
Bull 0.15 0.293 0.104
E (𝑅_𝑖) 8.50% 10.22%
σ_𝑖^ 0.01338 0.00068
2σ_𝑖 11.57% 2.60%
Cov(A,B) -0.001902
ρ_(𝐴, -0.6323
𝐵)
a. E 𝑅_𝑃
( ) 10.8%
b. σ_𝑃^ 0.276736
2σ_𝑃 52.61%
a. E (𝑅_𝑃) 11.2%
σ_𝑃^ 0.278352
2σ_𝑃
52.76%
b. σ_𝑃^ 0.143568
2σ_𝑃
37.89%
 Expected Standard
Security Correlation* Beta CAPM
Return Deviation

Firm A 0.10 0.38 0.43 0.90 11.20%

Firm B 0.14 0.54 0.45 1.35 14.80%
Firm C 0.15 0.74 0.32 1.32 14.52%
The market portfolio 0.12 0.18 1.0 1.0

The risk-free asset 0.04 0 0 0

Slope(CML) 0.3778
E (𝑅_𝑃) 9.79% σ_𝑃 38.38%
CML
E (𝑅_𝑃) 19.00% 19.00%
20%
f(x) = 0.377777777777778 x + 0.045
15%
11.3%
9.79%

Expected Return
10%
4.5%
5%

0%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Standard deviation
 E (𝑅_𝑃) σ_𝑃
19.00% 11.3% 18%
9.79% 14%
19.00% 38.38%
4.5% 0%

% 35% 40%
Slope(CML) 0.3357
E𝑅_𝑀
( ) 11.50% σ_𝑀 21.45%
β_𝐼 0.74
E 𝑅_𝐼
( ) 9.65%
β_𝐼 1.02
E 𝑅_𝑍
( ) 11.54%
 Probability of
State of Economy State of Stock I Stock II
Economy

Recession 0.15 0.05 -0.21

Normal 0.70 0.18 0.10
Irrational exuberance 0.15 0.07 0.39
E (𝑅_𝑖) 14.40% 9.70%
14.40% 9.70%
β_𝑖 1.56 0.89
σ_𝑖^ 0.00305 0.02702
2σ_𝑖 5.53% 16.44%
Security Beta Expected
Return
SML
Pete Corp. 1.25 0.108
Repete Co. 0.87 0.082 12%

CAPM 10.80% 8.20% 10% f(x) = 0.0683969033771667 x + 0.0224981165152353

(R)market 9.09% 9.09%
8%

Expected return
R(F) 0 0.0225
R(M) 1 9.09% 6%

4%

2%

0%
0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40
Beta
1.20 1.40
 𝑅_1, 𝑅_𝑃 σ_𝑃^ σ_𝑃 𝑅_1,
State
Probability Return on Return on Return on 2
E( ) 2 3
of Outcome Security 1 Security 2 Security 3

1 0.15 0.20 0.20 0.05 20.0% 12.5% 0.001688 4.11% 12.5%

2 0.35 0.15 0.10 0.10 12.5% 12.5%
3 0.35 0.10 0.15 0.15 12.5% 12.5%
4 0.15 0.05 0.05 0.20 5.0% 12.5%
E (𝑅_𝑖) 12.5% 12.5% 12.5%
σ_𝑖^ 0.00212 0.00212 0.00213
2σ_𝑖 4.61% 4.61% 4.61%
Cov (1,2) 0.00125
ρ_1,2 0.5882
Cov (1,3) -0.002125
ρ_1,3 -1.0
Cov (2,3) -0.00125
ρ_2,3 -0.5882
𝑅_𝑃 σ_𝑃^ σ_𝑃 𝑅_2, 𝑅_𝑃 σ_𝑃^ σ_𝑃
E( ) 2 3 E( ) 2

12.5% 0.000000 0.00% 12.5% 12.5% 0.000437 2.09%

10.0%
15.0%
12.5%
 Return if State Occurs
State of
Probability of State Stock A Stock B
Economy
Bust 0.15 -0.08 -0.10
Normal 0.60 0.11 0.09
Boom 0.25 0.30 0.27
𝑅_𝑖
E( ) 12.90% 10.7%
Slope_SML 9.0%
MRP 9.0%
 Price if State Occurs
State of Economy Probability of State Stock A Stock A ( ) σ_𝑃^ σ_𝑃 β_𝑃
E𝑅_𝑃
Recession 0.20 $56
2
-17.65% 11.31% 0.03862 19.65% 0.494
Normal 0.60 $78 14.71%
Expansion 0.20 $86 26.47%
𝑅_𝐴
E( ) 10.59%
σ_𝐴^ 0.02201
2σ_𝐴
14.83%
β_𝐴 0.508
β_𝐵 0.463
 Expected
Stock Standard Deviation
Return
A 11% 43% Percentage in A 69.75%
B 15% 65% Percentage in B 30.25%
σ_𝑃^ 0.12988
2
ρ_(𝐴, 0.0107
𝐵)
E 𝑅_𝑃
( ) 12.21%
σ_𝑃^ 0.1069
2σ_𝑃
32.70%
ρ_(𝐴,
-0.1789
𝐵)

1.How to create Market Portfolio (Two Stocks)

𝑅_𝑓
2.00%
E (𝑅_𝑀) 12.546%
σ_(𝑃( 37.12%
𝑀))
MRP 10.55%
Sharpe Ratio max A proportion 0.284098 MAX Slope CML
Percentage in A 61.36%
Percentage in B 38.64%
Slope(CML) 0.284098
2.Confirm
E (R) 12.546% CAPM
Beta 1.00

3.Confirm CML
Investor portfolio
Invested in risk-free 50.00%
Invested in R(m) 50.00%

Portfolio return statistics-point on the CML

E(Rp) 7.27%
σ_𝑃 18.56%
Percentage in A 66.79% Percentage in A σ_𝑃 E 𝑅_𝑃
( )
Percentage in B 33.21% 0% 65.00% 15.00%
10% 58.70% 14.60%
20% 52.80% 14.20%
30% 47.43% 13.80%
40% 42.79% 13.40%
50% 39.16% 13.00%
60% 36.82% 12.60%
69.75% 36.04% 12.21%
80% 36.90% 11.80%
90% 39.31% 11.40%
100% 43.00% 11.00%

Percentage in Risk-Free Percentage in R(m) σ_𝑃

-1 2.00 74.24%
-0.9 1.90 70.53%
-0.8 1.80 66.82%
-0.7 1.70 63.10%
-0.6 1.60 59.39%
-0.5 1.50 55.68%
-0.4 1.40 51.97%
-0.3 1.30 48.26%
-0.2 1.20 44.54%
-0.1 1.10 40.83%
0 1.00 37.12%
0.1 0.90 33.41%
0.2 0.80 29.70%
0.3 0.70 25.98%
0.4 0.60 22.27%
0.5 0.50 18.56%
0.6 0.40 14.85%
0.7 0.30 11.14%
0.8 0.20 7.42%
0.9 0.10 3.71%
1 0.00 0.00%
1.1 -0.10 0.00%
1.2 -0.20 0.00%
1.3 -0.30 0.00%
1.4 -0.40 0.00%
1.5 -0.50 0.00%
1.6 -0.60 0.00%
1.7 -0.70 0.00%
1.8 -0.80 0.00%
1.9 -0.90 0.00%
2 -1.00 0.00%
Efficient frontier points
15.00% Expected Return and Standard Deviation of Portfolio Return Showing Efficient
Frontier
14.60%
16%
14.20% 8; 12.21%
14%
13.80%

Expected portfolio return

12%
13.40% 10%
13.00% 8%
6%
12.60% 4%
12.21% 2%
0%
0% 10% 20% 30% 40% 50% 60% 70% 80%

Standard deviation of portfolio return

E(Rp) CML
23.09%
22.04% Points on the Capital Market Line, CML
20.98% 25%
19.93%
f(x) = 0.284097540626426 x + 0.0200000000000001
Expected portfolio return

18.87% 20%

17.82% 15%
16.76% 16; 7.27%
15.71% 10%
14.65%
5%
13.60%
12.55% 0%
11.49% 0% 10% 20% 30% 40% 50% 60% 70% 80%
10.44% Standard deviation of portfolio return
9.38%
8.33%
7.27%
6.22%
5.16%
4.11%
3.05%
2.00%
2.20%
2.40%
2.60%
2.80%
3.00%
3.20%
3.40%
3.60%
3.80%
4.00%
owing Efficient

0% 70% 80%

CML

0001

0% 70% 80%
 10-Year Annual Standard The Sharpe Percentage
Weights
Return Deviation ratio in

Bledsoe S&P 500 Index Fund 11.04 18.45 0.4249

Bledsoe Small-Cap Fund 16.14 29.18 0.4435
Bledsoe Large-Company Stock Fund 12.15 24.43 0.3664 20.13% 10.06%
Bledsoe Bond Fund 6.93 9.96 0.3745 79.87% 89.94%
East Coast Yachts Stock 16 58 0.2207

Portfolio standard Efficient frontier

Weight of stock fund Portfolio E(R)
deviation points
0% 6.93% 9.9600% 6.93%
10% 7.45% 9.6380% 7.45% Invest
20% 7.97% 9.9520% 7.97% Sharpe optimal port-
14%
folio
20.13% 7.98% 9.9600% 7.98%
12%
30% 8.50% 10.8468%

Portfolio Expected Return

40% 9.02% 12.1952% Efficient frontier
10%
point
50% 9.54% 13.8656% 8%
60% 10.06% 15.7559% T
6% va
70% 10.58% 17.7961%
80% 11.11% 19.9403% 4%
90% 11.63% 22.1583% 2%
100% 12.15% 24.4300%
0%
8% 10% 12%
 Sharpe optimal
risk-free 3.2%
portfolio
σ_𝑃^ 0.0092891
2
E(R) 7.4554%
28.35% σ_𝑃 9.6380%
71.65% MRP 5.21%
E(R) 8.41%
σ_𝑃 10.66%
Sharpe Ratio 0.4885 MAX Slope CML

Investment Opportunity Set

Sharpe optimal port-
14%
folio
12%

rontier
10%
t
8%
The minimum
6% variance portfolio

4%

2%

0%
8% 10% 12% 14% 16% 18% 20% 22% 24% 26%
Portfolio Standard Deviation