Standard deviation of the return on the market portfolio

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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)?

Reference no: EM133117046

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