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Assume there are two portfolios available in the market: Portfolio A B Expected return 10% Standard Deviation 15% 10% Beta 1.0 0.6 8% a) If
Assume there are two portfolios available in the market: Portfolio A B Expected return 10% Standard Deviation 15% 10% Beta 1.0 0.6 8% a) If CAPM holds, find risk-free rate and market risk premium. b) If correlation coefficient between two portfolios is 0.7 (positive), please find standard deviation of equally weighted portfolio. Assume that it is possible to borrow at risk-free rate. Consider an investor who invests $50,000 in a portfolio consisting of A and B. $10,000 of that investment was funded with risk-free borrowing. c) Find weights of portfolio if the resulting return is 8.5%. d) Find standard deviation of such portfolio (keeping in mind correlation coefficient from b). e) Explain why beta is the appropriate measure of risk in the world of CAPM. Assume there are two portfolios available in the market: Portfolio A B Expected return 10% Standard Deviation 15% 10% Beta 1.0 0.6 8% a) If CAPM holds, find risk-free rate and market risk premium. b) If correlation coefficient between two portfolios is 0.7 (positive), please find standard deviation of equally weighted portfolio. Assume that it is possible to borrow at risk-free rate. Consider an investor who invests $50,000 in a portfolio consisting of A and B. $10,000 of that investment was funded with risk-free borrowing. c) Find weights of portfolio if the resulting return is 8.5%. d) Find standard deviation of such portfolio (keeping in mind correlation coefficient from b). e) Explain why beta is the appropriate measure of risk in the world of CAPM
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