Question
Assume that you currently have 44% of your wealth in a risk-free asset and 56% in the two mutual funds below, which you may assume
Assume that you currently have 44% of your wealth in a risk-free asset and 56% in the two mutual funds below, which you may assume are efficiently and correctly priced:
Fund Expected Return on Stock (%) Beta of Fund % of Wealth Invested in Fund
A. 0.60 0.70 32
B 8.25 1.15 24
Required: (be sure to show your work)
(a) Using the CAPM, and assuming the market is in equilibrium, calculate the risk-free rate and the expected return on the market portfolio.(4 marks)
Notwithstanding your answers in part (a), use rf= 3% and E(rM) = 8% for parts (b) through (d).
(b)Calculate the expected return on your portfolio.(3 marks)
(c)Calculate the beta of your portfolio?(3 marks)
(d)You want to invest in only the risk-free asset and the market portfolio. You want an expected rate of return of 6.5%. How would you allocate your wealth between the risk-free asset and the market portfolio?(3 marks)
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