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3. You run a CAPM regression on the trading strategy AFK. The annualized results are below: Variable Coefficient Lower 95% Upper 95% Intercept 0.03
3. You run a CAPM regression on the trading strategy AFK. The annualized results are below: Variable Coefficient Lower 95% Upper 95% Intercept 0.03 0.01 0.05 TM-rf 1.10 1.005 1.195 At the same time, you estimate that the market portfolio has a Sharpe Ratio of 0.5 and a standard deviation of returns equal to 20%. The risk-free rate is 1%. a. Find the expected return on the market portfolio. b. Find the expected return on AFK. c. Suppose you have 1 dollar. How would you combine AFK and MKT to create a portfolio with no market risk but with expected return higher than the risk-free rate? You then follow your CAPM regression with a 3-Factor regression of AFK, which generates the output: Variable Coefficient Lower 95% Upper 95% Intercept .001 -0.001 0.003 rf 1.10 1.005 1.195 SMB 0.062 -0.138 0.262 HML 0.351 0.151 0.551
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