1. The following shows a single-index pricing model for an asset X. ex is the error term from regression. Rm is the excess return of the market portfolio. Rx is the excess return of the asset X. Rx = ax + Bx Rm +ex It is given that ox = 0.8 and on = 0.8. The risk-free rate is 1% (a) If CAPM model predicts perfectly, and Rm = 9%, i. (2 points) What is a and ex? Explain. ii. (1 point) Find the value of Rx if Bx = 2. iii. (2 points) Find the correlation coefficient between Rx and Rm if Bx = 2. (b) In this part, you should not assume CAPM model being true. Here Bx = 2. i. (2 points) If E(Rx) = 5% when E(RM) = 3%, find the alpha of asset X. Hence, is it a good-buy? Why or why not? ii. (2 points) If an SML is needed to draw with M as the market portfolio, what is the slope of the SML? iii. (2 points) Try to draw an SML and show the position of X and M. iv. (4 points) A portfolio consisting of 40% of X and 60% of M is formed. Find the expected return and volatility of this portfolio. 1. The following shows a single-index pricing model for an asset X. ex is the error term from regression. Rm is the excess return of the market portfolio. Rx is the excess return of the asset X. Rx = ax + Bx Rm +ex It is given that ox = 0.8 and on = 0.8. The risk-free rate is 1% (a) If CAPM model predicts perfectly, and Rm = 9%, i. (2 points) What is a and ex? Explain. ii. (1 point) Find the value of Rx if Bx = 2. iii. (2 points) Find the correlation coefficient between Rx and Rm if Bx = 2. (b) In this part, you should not assume CAPM model being true. Here Bx = 2. i. (2 points) If E(Rx) = 5% when E(RM) = 3%, find the alpha of asset X. Hence, is it a good-buy? Why or why not? ii. (2 points) If an SML is needed to draw with M as the market portfolio, what is the slope of the SML? iii. (2 points) Try to draw an SML and show the position of X and M. iv. (4 points) A portfolio consisting of 40% of X and 60% of M is formed. Find the expected return and volatility of this portfolio