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Assume that you manage a risky portfolio with an expected rate of return of 17% and a standard deviation of 27%. The T-bill rate is 7%.

You estimate that a passive portfolio invested to mimic the S&P 500 stock index provides an expected rate of return of 13% with a standard deviation of 25%.

a. What is the slope of the CML?

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Answer #1

a). Slope = [E(rM) - rF] /

= [0.13 - 0.07] / 0.25 = 0.06 / 0.25 = 0.24

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