A B

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Security Market Line (SML) and CAPM

Risk-free rate

Average return
Standard deviation (sigma) of return
Variance (sigma ^ 2)
Correlation
Covariance of returns

2.00%
Stock A
8.00%
10.00%
0.0100
0.2000
0.0040

Stock B
14.00%
20.00%
0.0400

Market portfolio M: maximizes the Sharpe ratio

Proportion of stock A
Proportion of stock B

Please note: if you change inputs, you have to re-run solver!

66.67% << Solver only, please
33.33%

Expected market portfolio return, E(rM)

10.00%
0.0107
10.33%

Market portfolio: return variance

Market portfolio: standard deviation
Market excess return over risk-free rate
Market portfolio maximizes Sharpe ratio:

Portfolio consisting of:

% in Asset A
% in Asset B
Expected Portfolio Return, weighted
Using Security Market Line:
Cov (portfolio, market)
Beta (portfolio with respect to market)
CAPM (SML): Expected return = riskless rate + (beta)*(ERP)

8.00%
0.77 << Need to Max D21 by Changing Cell D13

Only
Asset A
100.00%
0.00%
8.00%

Only
Asset B
0.00%
100.00%
14.00%

Mix
50.00%
50.00%
11.00%

Match
Market
Portfolio!
66.67%
33.33%
10.00%

0.0080
0.7500
8.00%

0.0160
1.5000
14.00%

0.0120
1.1250
11.00%

0.0107
1.0000
10.00%