Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Assume a market portfolio consisting of two securities, i = 1,2. Further, assume that the weight of security 1 in the market portfolio is W
Assume a market portfolio consisting of two securities, i = 1,2. Further, assume that the weight of security 1 in the market portfolio is W1 = 0.5 and that the covariance matrix is given below.
a) Compute the variance of the market portfolio, M2 when the standard deviations for i = 1,2 are 5 and 8 percent respectively .
R1 | R2 | |
R1 | 0.2 | 0.1 |
R2 | 0.1 | 0.2 |
b) Compute the CAPM-betas of security 1 and security 2, i.e. 1 and 2. [4]
c) Assume that E[rM] = 0.05 (i.e., 5%) and rf = 0.01 (i.e., 1%). Compute the expected return of both securities and their Sharpe ratios.
Step 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