Question
Assume that the following market model adequately describes the return generating behavior of risky assets: Rit=i+iRMt+itRit=i+iRMt+it Here: R it = The return on the i
Assume that the following market model adequately describes the return generating behavior of risky assets: |
Rit=i+iRMt+itRit=i+iRMt+it |
Here: |
Rit = The return on the ith asset at Time t. |
RMt = The return on a portfolio containing all risky assets in some proportion at Time t. |
RMt and itit are statistically independent.
|
Short selling (i.e., negative positions) is allowed in the market. You are given the following information: |
Asset | i | E(Ri ) | Var(i) | |
A | .71 | 8.51 | % | .0800 |
B | 1.21 | 12.16 | .0151 | |
C | 1.57 | 13.85 | .0232 | |
The variance of the market is .0128, and there are no transaction costs. |
a. | Calculate the standard deviation of returns for each asset. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) |
Asset | Standard deviation |
A | % |
B | % |
C | % |
b. | Calculate the variance of return of three portfolios containing an infinite number of asset types A, B, or C, respectively. (Do not round intermediate calculations and round your answers to 6 decimal places, e.g., 32.161616.) |
Asset | Variance of return |
A | |
B | |
C | |
c-1. | Assume the risk-free rate is 3.6 percent and the expected return on the market is 9.6 percent. What is the expected return of each asset? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) |
Asset | Expected returns |
A | % |
B | % |
C | % |
c- 2. | Which asset will not be held by rational investors? | ||||||
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