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3 years ago

Investment Management Inc. (IMI) uses the capital market line to make asset allocation recommendations. IMI derives the

Business

1 answer:

algol133 years ago

5 0

Answer:

The expected return that IMI can provide subject to Johnson's risk constraint is 8.5%

Explanation:

Capital Market Line (CML)

Expected return on the market portfolio, E( $r_m$ ) = 12 %

Standard deviation on the market portfolio, σ $_p$ = 20%

Risk-free rate, $r_f$ = 5%

E( $r_c$ ) = $r_f$ + [ E( $r_p$ ) - $r_f$ ] × ( σ $_c$ ÷ σ $_p$ )

= 0.05 + [ 0.12 - 0.05] × (0.10 ÷ 0.20)

= 8.5%

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