Question
A small economy, the market portfolio's expected return is 9.43% and volatility is 10.63%, furthermore, the risk-free interest rate is 2.59%. The two shares A
A small economy, the market portfolio's expected return is 9.43% and volatility is 10.63%, furthermore, the risk-free interest rate is 2.59%. The two shares A and B that are traded on this market have beta values of 0.58 and 1.58, respectively.
Calculate expected return according to CAPM and beta value for a portfolio that consists of 50 % of the risk-free asset, 29% of shares in A and 21% of shares in B? Illustrate SML and place the portfolio, the market portfolio and the two stocks.
Assume that the CAPM holds and that stock A has a standard deviation of 10%, stock B has one standard deviation of 20% and that stock A and stock B have a correlation of 0.09.
Give one graphical argument for whether it is a good idea to invest in a portfolio that consists of 50 % of the risk-free asset, 29% of shares in A and 21% of shares in B?
Step by Step Solution
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Step: 1
To calculate the expected return of the portfolio using the Capital Asset Pricing Model CAPM we can use the following formula Expected Return RiskFree ...
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Foundations of Financial Management
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
10th Canadian edition
1259261018, 1259261015, 978-1259024979
