Can an investor use this asset to make a risk-free profit

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Reference no: EM132019040

Suppose there is a risk-free asset whose return is 5% and that the market portfolio has an expected return of 9%. The standard deviation of the market portfolio is given 20%.

(a) Find the security market line.

(b) Suppose there is an asset whose covariance with the market is given by 450%2 . Find its equilibrium price according to CAPM.

(c) Consider an asset with ß_i = 1.5 and expected return of 12%. Can an investor use this asset to make a risk-free profit through arbitrage? Explain your answer.

Reference no: EM132019040

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