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Assume that the risk-free rate is 1%. Consider the following CAPM parameter values:
Portfolio Expected return Beta
A 15% 1.5
B 6% 0.4
Market 13.5% 1
Assume in addition, that the market portfolio has a volatility of 20%. Each of portfolio A and B have an unsystematic variance of 0.0036.
(a) What is the equation for the SML of this economy?
(b) What are the alphas of portfolio A and B?
(c) What is the equation for the CAL using the T-bills and an equally weighted portfolio of A and B?
(d) What is the equation for the CML? Assuming the market portfolio is already the optimal risky portfolio.
(e) What is the weight of the optimal risky portfolio in an investor's complete optimal portfolio? Assuming the investor's risk aversion A = 10, and his complete portfolio comprises the optimal risky portfolio and T-bills
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