Assume the CAPM holds and the following two stocks are in equilibrium. Stock Return Beta J 12%
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Question:
Assume the CAPM holds and the following two stocks are in equilibrium.
| Stock | Return | Beta |
| J | 12% | 1.2 |
| Z | 18% | 2.0 |
a) derive the Securities Market Line (SML) equation.
b) Assume portfolio K, a mutual fund, with beta of 1.6 has rate of return of 13%. If the CAPM is the benchmark model, evaluate portfolio Ks performance.
c) if portfolio K is traded like any stock in the market, design any arbitrage opportunity and show what rate of return can be earned with zero beta and zero investment.
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