Suppose that you currently have $250,000 invested in a portfolio with an expected return of 12% and a volatility of 9%. The efficient (tangent) portfolio has an expected return of 12% and a volatility of 12%. The risk-free rate of interest is 3%. You want to maximize your expected return without increasing your risk. Without increasing your volatility beyond its current 9%, the maximum expected return you could earn is closest to:

9.75%

Explanation:

The capital asset pricing model is used to calculate required rate of return for a certain project. The rate of return is calculated based on risk free rate and rate of return with the volatility. In the given scenario the maximum expected return will be calculated using the CAPM model,

E Rp = Rf + volatility p (E [Rm] - Rf) / volatility m

0.03 + 0.09 (0.12 -0.03) / 0.12

= 9.75%

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