Reference no: EM133117046
Assume the risk-free rate is 2% (rf = 2%), the expected return on the market portfolio is 6% (rM = 6%) and the standard deviation of the return on the market portfolio is 15% (σM = 15%). (All numbers are annual.) Assume the CAPM holds.
a. What are the expected returns on securities with the following betas:
(i) β = 1.4
(ii) β = 0.6
(iii) β = -0.2
b. What are the betas of securities with the following expect returns:
(i) 10%
(ii) 5%
(iii) -1%
c. What are the portfolio weights (in the risk-free asset and the market portfolio) for efficient portfolios (portfolios on the efficient frontier/CML) with expected returns of
(i) 4%
(ii) 5%
(iii) 7%
d. What are the portfolio weights (in the risk-free asset and the market portfolio) for efficient portfolios (portfolios on the efficient frontier/CML) with standard deviations of
(i) 6%
(ii) 15%
(iii) 21%
e. For a moment (but just a moment) assume that the CAPM may not hold. A non-dividend paying stock has a current price of $50/share and an expected price in 1 year of $53/share (based on your personal analysis of the company's prospects).
(i) If the stock has a beta of 1 (β = 1.0), what is its alpha (α)?
(ii) What is the alpha (α) if the beta is 2 (β = 2.0)?