Problem:
A portfolio that combines the risk-free asset and the market portfolio has an expected return of 6.4 percent and a standard deviation of 9.4 percent. The risk-free rate is 3.4 percent, and the expected return on the market portfolio is 11.4 percent. Assume the capital asset pricing model holds.
Required:
Question: What expected rate of return would a security earn if it had a .39 correlation with the market portfolio and a standard deviation of 54.4 percent?
Note: Please show how you came up with the solution.