What is the expected return to the given asset

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1. Compare Eq. (8.16) to the CAPM result for expected returns, to relate u to rQ. Impose the requirement that E{u} = 1 to determine u exactly as a function of rQ.

2. Using the simple stock example in the text, price an instrument which pays $1 in state 1 [cf(t,1) = 1] and $-1 in state 2 [cf(t,2) = -1]. What is the expected return to this asset? What is its beta with respect to the stock? How does this relate to the breakdown of Eq. (8.7)?

Text Book: Active Portfolio Management, 2/E By Grinold.o Management, 2/E By Grinold.

Reference no: EM13925463

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