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1. Suppose we have an economy where there are only three risky assets. The market portfolio of this economy is described in Table 1. Assume
1. Suppose we have an economy where there are only three risky assets. The market portfolio of this economy is described in Table 1. Assume that the correlation between the returns Table 1: Market Portfolio Information. on any pair of assets is 0.5 and there is also a risk free asset. In addition, assume that the CAPM model is satisfied. (a) (10 points) Calculate the expected rate of return and standard deviation of the market portfolio. (b) ( 10 points) Calculate the betas of the three assets. (c) (5 points) Use solution to 1(b) to find the beta of the market portfolio. (d) ( 10 points) What is the return of the risk-free rate implied by these returns? (e) (5 points) Describe how the model of the market portfolio could be (possibly) used to price a new asset, D. 1. Suppose we have an economy where there are only three risky assets. The market portfolio of this economy is described in Table 1. Assume that the correlation between the returns Table 1: Market Portfolio Information. on any pair of assets is 0.5 and there is also a risk free asset. In addition, assume that the CAPM model is satisfied. (a) (10 points) Calculate the expected rate of return and standard deviation of the market portfolio. (b) ( 10 points) Calculate the betas of the three assets. (c) (5 points) Use solution to 1(b) to find the beta of the market portfolio. (d) ( 10 points) What is the return of the risk-free rate implied by these returns? (e) (5 points) Describe how the model of the market portfolio could be (possibly) used to price a new asset, D
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