Question
Asset Beta E[R] 1 0.5 0.1 0.30 2 1.5 0.2 0.15 A. Is the situation described in the table below possible in equilibrium, i.e., does
Asset | Beta | E[R] | |
1 | 0.5 | 0.1 | 0.30 |
2 | 1.5 | 0.2 | 0.15 |
A. Is the situation described in the table below possible in equilibrium, i.e., does CAPM hold in this case? Assume that the standard deviation of the return on the market portfolio, M, is 0.2.
(contd) B. Assume that CAPM holds and you have the following data for two securities, A and B (unrelated to asset 1 and asset 2 in part A):
Asset | Beta | |
A | 0.5 | 0.30 |
B | 1.5 | 0.15 |
The risk free rate of return is 5%, expected return on the market portfolio is 10%, and the correlation between the return on A and the return on B is -0.2. Assume that the standard deviation of the return on the market portfolio, M, is 8%.
B1. Find the composition of the minimum variance portfolio constructed of only A and B.
B2. Find the exact composition of the best (i.e., mean-variance efficient) portfolio that has the same expected return as the minimum variance portfolio from part B1?
B3. Find the standard deviation of the best portfolio from part B2
Transcribed image textStep by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started