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2 CAPM and betas [2.5 points] In this question, you'll verify an example of the following (more general) result: the beta of a portfolio is
2 CAPM and betas [2.5 points] In this question, you'll verify an example of the following (more general) result: the beta of a portfolio is the average of the betas of the assets that are used to build the portfolio. Assume that the CAPM holds exactly and consider two assets, A and B. The expected return is E (ra)-16% and E(ra)-9%, and the expected return of the market portfolio is E(TM) = 12%. The risk-free rate is 2%. 1. Compute the betas of asset A and B. [1 point] 2, Compute the expected return of a portfolio P with 30% weight on A and 70% weight on B. Compute the beta of portfolio P. [1 point] HINT: recall that the we are assuming that the CAPM holds exactly: thus, use the CAPM equation E (rp) = r, + ???? (rM)-ry] and solve for pl 3. What is the weighted average of BA and BB (using the same weights as portfolio P)? Is your result the same as the value of Bp in your previous answer? [0.5 points
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