Question
Are the following statements True, False, or Ambiguous? Provide a short justification for your answer. (You will be evaluated mostly on the basis of your
Are the following statements True, False, or Ambiguous? Provide a short justification for your answer. (You will be evaluated mostly on the basis of your justification.) For part (a), (b), and (c) we assume that the expected return of the market is rm = 8% with a standard deviation of m = 20%; we also assume that the risk-free rate is rf = 2%. (a) The following information is inconsistent with the CAPM model. The expected return of Apple is rApple = 10%. (b) The following information is inconsistent with the CAPM model. The expected return of Apple is rApple = 10% with a standard deviation of Apple = 30%. (c) The following information is inconsistent with the market being mean-variance efficient. The expected return of Apple is rApple = 10% with a standard deviation of Apple = 30%, and the correlation with the market is = 2/3. (d) Compared with an investment in IBM shares, an investment in a European call option on IBM shares is riskier.
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