If the simple CAPM is valid, which of the following situations are possible?

a.
* Portfolio A has an expected Return of 10% and a Beta of 1.1
* Portfolio B has an expected Return of 9% and a Beta of 1.2

b
* Portfolio A has an expected Return of 10% and a Standard Deviation 15%
* Portfolio B has an expected Return of 5% and a Standard Deviation 20%

Puzzman

Well for A to work

10% = Rf + 1.1 *(Rm-Rf) and 9% = Rf + 1.2*(Rm - Rf)

So unless we are dealing with a negative risk premium A can't work

B works if we remember that there are two sides of the efficient frontier curve.

kdravie

A. Solving for both equestions: I get Rm=11% and Rf = 21%.
So technically it's possible. Although an Rf of 21% is concentrated utopia.

B. can u explain further?

Puzzman

Well Rf is the risk free rate, i.e the rate you will get by putting money in the bank. While Rm is the market rate the rate you will get from investing. So logically Rm should be bigger than Rf, which is why I reckon A doesn't hold for the CAPM model.

As for B, the efficient frontier, just proves that you can have a portfolio with a lower rate of return and a high standard division than another portfolio.

Basically it states the if you have portfolio A & B, there will also be a portfolio C with a 15% return and a 20% SD.

And that no one should ever pick portfolio B over C.