Answer: 0.15

## Explanation This question uses the **Capital Market Line (CML)** formula to calculate the expected return of a portfolio consisting of a risk-free asset and the market portfolio. ### CML Formula: $$ R_p = R_f + \left( \frac{R_m - R_f}{\sigma_m} \right) \sigma_p $$ Where: - $R_p$ = Expected portfolio return - $R_f$ = Risk-free rate = 5% - $R_m$ = Expected market return = 25% - $\sigma_m$ = Standard deviation of market portfolio = 10% - $\sigma_p$ = Standard deviation of portfolio = 5% ### Calculation: $$ E(R_p) = 5 + \frac{(25 - 5)}{10} \times 5 $$ $$ E(R_p) = 5 + \frac{20}{10} \times 5 $$ $$ E(R_p) = 5 + 2 \times 5 $$ $$ E(R_p) = 5 + 10 = 15\% $$ ### Key Points: - The portfolio is on the CML, which represents efficient portfolios combining the risk-free asset and the market portfolio - The slope $\frac{R_m - R_f}{\sigma_m} = \frac{20}{10} = 2$ represents the market price of risk - The portfolio's standard deviation (5%) is less than the market's (10%) because it includes the risk-free asset - The expected return of 15% is appropriately between the risk-free rate (5%) and market return (25%)

Author: Tanishq Prabhu