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  3. b) the market portfolio (m) provides an expected r

b) The market portfolio (M) provides an expected return of 11% pa. The risk-free rate...

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Accounting

b) The market portfolio (M) provides an expected return of 11% pa. The risk-free rate of return (rf) is 3% pa. Based on this information, equity analyst Ming Shi draws the following Securities Market Line (SML) and identifies some investment opportunities (A, B, C and D) on the graph for his clients.

Mings client Jen wants to earn 2% pa abnormal return (Alpha) from her investments; however, she is a very risk-averse investor and doesnt want to take a short position.

Mings other client Kim wants to earn 5% pa Alpha from her investments, and she doesnt mind taking a short position.

image

A.Identify the labels for Axis X and Axis Y in the Chart above.

B.Among A, B, C and D on the graph - identify which investment is most appropriate for Jen to fulfil her investment goal. Justify your answer with proper calculations and reasons.

C. Among A, B, C and D on the graph - identify which investment is most appropriate for Kim to fulfil her investment goal. Justify your answer with proper calculations and reasons.

Securities Market Line Y Axis

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