The equation for the capital market line is:
Johnson requests the portfolio standard deviation to equal one half of the market portfolio standard deviation. The market portfolio standard deviation equals 20%. Therefore, Johnson’s portfolio should have a standard deviation equal to 10%. The intercept of the capital market line equals the risk free rate (5%), and the slope of the capital market line equals the Sharpe ratio for the market portfolio (35%). Therefore, using the capital market line, the expected return on Johnson’s portfolio will equal:
