Question

Assume that the CAPM holds. The expected return of the market portfolio is 15%, and the...

Assume that the CAPM holds. The expected return of the market portfolio is 15%, and the standard deviation of the market portfolio is 25%. The risk free rate is 5%. A friend of yours now claims that a portfolio exists that has an expected return of 12% with a standard deviation of 10%. Is it possible that this claim is true and this portfolio exists under this scenario? Why?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

As per CAPM:

Putting values in the above formula:

12% = 5% + beta * (15% - 5%)

Solving this, we get, beta of the stock = 0.7. This implies that the stock is low beta stock, which means it is less risky than the market.

  • Standard Deviation of Market = 25%
  • Standard Deviation of Stock = 10%

This also implies that the stock is less risky than the market.

Hence, it possible that this claim is true and this portfolio exists under this scenario.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Assume that the CAPM holds. The expected return of the market portfolio is 15%, and the...
Assume that the CAPM holds. The expected return of the market portfolio is 15%, and the standard deviation of the market portfolio is 25%. The risk free rate is 5%. A friend of yours now claims that a portfolio exists that has an expected return of 12% with a standard deviation of 10%. Is it possible that this claim is true and this portfolio exists under this scenario? Why?
Assume that the CAPM holds. The expected return of the market portfolio is 15%, and the...
Assume that the CAPM holds. The expected return of the market portfolio is 15%, and the standard deviation of the market portfolio is 25%. The risk free rate is 5%. A friend of yours now claims that a portfolio exists that has an expected return of 12% with a standard deviation of 10%. Is it possible that this claim is true and this portfolio exists under this scenario? Why?
Assume that the CAPM holds. The expected return of the market portfolio is 15%, and the...
Assume that the CAPM holds. The expected return of the market portfolio is 15%, and the standard deviation of the market portfolio is 25%. The risk free rate is 5%. A friend of yours now claims that a portfolio exists that has an expected return of 12% with a standard deviation of 10%. Is it possible that this claim is true and this portfolio exists under this scenario? Why?
Assume that the CAPM holds. The expected return of the market portfolio is 15%, and the...
Assume that the CAPM holds. The expected return of the market portfolio is 15%, and the standard deviation of the market portfolio is 25%. The risk free rate is 5%. A friend of yours now claims that a portfolio exists that has an expected return of 12% with a standard deviation of 10%. Is it possible that this claim is true and this portfolio exists under this scenario? Why? You do not have to show your calculations. Just describe why...
Assume the CAPM holds. The risk-free rate is 5% and the market portfolio expected return is...
Assume the CAPM holds. The risk-free rate is 5% and the market portfolio expected return is 15% with a standard deviation of 20%. An asset has an expected return of 16% and a beta of 0.8. a) Is this asset return consistent with the CAPM? If not, what expected return is consistent with the CAPM? b) How could an arbitrage profit be made if this asset is observed? c) Would such a situation be expected to exist in the longer...
The risk-free rate of interest is 2%. Stock AAA has a beta of 1.4 and a standard deviation of return = .40. The expected return on the market portfolio is 9%. Assume CAPM holds.
1.             The risk-free rate of interest is 2%.  Stock AAA has a beta of 1.4 and a standard deviation of return = .40.  The expected return on the market portfolio is 9%. Assume CAPM holds.  (Note:  the questions below are independent not sequential.)a)             Plot the security market line.  Label all axes of your graph.  Plot (and label) the points (and numerical values) corresponding to the market portfolio, the risk-free asset, and stock AAA.b)            Your current wealth is $1,000.  What is the expected returnfor a portfolio where youborrow$500 at the risk-free...
35. Assume the expected return on the market portfolio is 15% and its standard deviation is...
35. Assume the expected return on the market portfolio is 15% and its standard deviation is 12%. The risk-free rate is 5%. Denote the expected return and beta of securities on the Security Market Line (SML) with () and β, respectively. Which statement is TRUE? A) The beta of a CML portfolio that contain 150% of the market portfolio and 50% borrowed money is 1.25. B) The SML can be represented by the following equation: C) The slope of the...
Assume that CAPM is a good representation of the risk-return relationship. You are holding a portfolio...
Assume that CAPM is a good representation of the risk-return relationship. You are holding a portfolio of stocks. The portfolio’s standard deviation is 40% and its correlation with "M" is 0.8. The risk free rate is 2.5%, the expected market return is 12%, and the standard deviation of the market return is 17.6%. What is the expected return on your portfolio? Is this portfolio efficient? How can you tell? If this portfolio is not efficient, how much risk reduction could...
Suppose that the market portfolio has an expected return of 10%, and a standard deviation of...
Suppose that the market portfolio has an expected return of 10%, and a standard deviation of returns of 20%. The risk-free rate is 5%. b) Suppose that stock A has a beta of 0.5 and an expected return of 3%. We would like to evaluate, according to the CAPM, whether this stock is overpriced or underpriced. First, construct a tracking portfolio, made using weight K on the market portfolio and 1 − K on the risk-free rate, which has the...
A portfolio that combines the risk-free asset and the market portfolio has an expected return of...
A portfolio that combines the risk-free asset and the market portfolio has an expected return of 7.4 percent and a standard deviation of 10.4 percent. The risk-free rate is 4.4 percent, and the expected return on the market portfolio is 12.4 percent. Assume the capital asset pricing model holds. What expected rate of return would a security earn if it had a .49 correlation with the market portfolio and a standard deviation of 55.4 percent?  Enter your answer as a percent...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT