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Assume the CAPM holds. The risk-free rate is 4% and the market portfolio expected return is 10% and standard deviation of 10%. An asset has
Assume the CAPM holds. The risk-free rate is 4% and the market portfolio expected return is 10% and standard deviation of 10%. An asset has an expected return of 6% and a beta of 0.8.
a Is this asset return consistent with the CAPM?
b What expected return is consistent with the CAPM?
c How could an abnormal profit be made if this asset is observed? Would such a situation be expected to exist in the longer term?
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