Question

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
return**for a portfolio where you**borrow**$500 at the risk-free rate and**invest $1,500**in stock AAA?

c) What
is the **standard deviation of return**for the
portfolio in (b) above?

d) If
a portfolio of the two assets (the risk-free asset, and stock AAA)
has an expected return of 14%, what is the portfolio’s**beta?**

Answer #1

Rf =2%, beta =1.4, SD(s) = 0.40 =40%, Rm=9%

(a) SML

(b) WEIGHT OF RISK FREE ASSET (W_{R})= -500/1000 = -0.5
, WEIGHT OF STOCK AAA (W_{S})= 1500/1000 = 1.5

Rs = Rf + beta(Rm-Rf) = 2% + 1.4(9%-2%) = 11.8%

**EXPECTED RETURN ON PORTFOLIO = W _{R}*Rf +
W_{S}*Rs = (-0.5)(2) + (1.5)(11.8) = -1 + 17.7 = 16.7
%**

(c ) AS RISK FREE ASSET HAS ZERO STANDARD DEVIATION,

**PORTFOLIO STANDARD DEVIATION = W _{S}*SDs =
1.5*0.4 =0.6 = 60%**

(d)

EXPECTED RETURN ON PORTFOLIO = W_{R}*Rf +
W_{S}*Rs

14 = (W_{R})(2) + (W_{S})(11.8)
= (W_{R})(2) + (1 -
W_{R})(11.8)

14 = (W_{R})(2) + (11.8) -
(W_{R})(11.8)

2.2 = -9.8

(W_{R}) = - 0.2245, THEREFORE (W_{S})
= 1 - (W_{R}) = 1 - (- 0.2245) = 1.2245

AS RISK FREE ASSET HAS ZERO BETA,

**PORTFOLIO BETA = BETA OF STOCK AAA X (W _{S}) =
1.4 X 1.2245 = 1.7143**

**ANY DOUBTS, FEEL FREE TO ASK**

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...

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 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 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?

A stock has a beta of 1.8. The risk-free rate is 2%. Assume that
the CAPM holds.
A: What is the expected return for the stock if the expected
return on the market is 11%? 3+ Decimals
B: What is the expected return for the stock if the expected
market risk premium is 11%? 3+ Decimals

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...

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...

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...

A portfolio invests in a risk-free asset and the market
portfolio has an expected return of 7% and a standard deviation of
10%. Suppose risk-free rate is 5%, and the standard deviation on
the market portfolio is 22%. For simplicity, assume that
correlation between risk-free asset and the market portfolio is
zero and the risk-free asset has a zero standard deviation.
According to the CAPM, which of the following statement is/are
correct?
a. This portfolio has invested roughly 54.55% in...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 2 minutes ago

asked 7 minutes ago

asked 10 minutes ago

asked 24 minutes ago

asked 44 minutes ago

asked 46 minutes ago

asked 52 minutes ago

asked 52 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago