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Below, you are given the expected returns and standard deviation of l'Oreal and Daimler AG, the Euro Stoxx 50 Index of largest Eurozone firms, and the risk free asset.
asset expected return standard deviation
l'Oreal 16% 30%
Daimler 12% 25%
Euro stoxx 13% 12%
Risk free asset 3% 0%
Question a) Assuming that the returns are explained by the capital asset pricing model, calculate the betas of l'Oreal and Daimler and the risk of a portfolio holding l'Oreal and Daimler with an expected return the same as the Euro Stoxx 50 Index Return.
Question b) Construct a portfolio of the Euro Stoxx 50 Index and the risk-free asset that will produce an expected return of 12%. Contrast the risk on this portfolio with the risk of Daimler.
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