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Question - You have $1 million to invest, and you must invest all your money. The following are assets you can invest: Expected Return Beta Risk-free asset 6% Not given Stock X 30% 1.8 Stock Y 20% 1.3
(a) Suppose you want to create portfolio that has an expected return of 12% by investing in the risk-free asset and Stock X. Calculate how much money you will invest in Stock X.
(b) Suppose you want to create portfolio with a systematic risk that is 70% of the risk of the overall market, by investing in the risk-free asset and Stock X. Calculate how much money you will invest in Stock X.
(c) Suppose you are told that the beta of Stock X is correct, but there is uncertainty whether the beta of Stock Y is correct. Using the CAPM framework, determine whether the beta of Stock Y is correct.
(d) You have learned in this course that if you invest only in X and Y, this 2-asset portfolio will have a higher return than the portfolio return when a risk-free asset (such as Treasury bills) is also included. This being the case, appraise why anyone would want to hold Treasury bills in their portfolio.
Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest. How much control does the Fed have over this longer real rate?
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