Click

on the icon located on the top-right corner of the data table below in order to copy its contents into a

spreadsheet.)

	Expected Return		Volatility
Value Stocks	10%		9%
Growth Stocks	17%		24%

Suppose you group all the stocks in the world into mutually exclusive portfolios (each stock is in only one portfolio): growth stocks and value stocks. Suppose the two portfolios have equal size (in terms of total value), a correlation of 0.5, and the following characteristics:

. The risk free-rate is 4%.

a. What is the expected return and volatility of the market portfolio (which is a 5050

combination of the two portfolios)?

b. Calculate the Sharpe ratios of the value stock, growth stock, and market portfolio.

c. Does the CAPM hold in this economy?(HintIs the market portfolio efficient?)

What is the expected return and volatility of the market portfolio (which is a

5050

combination of the two portfolios)?The expected return of the market portfolio is

nothing%.

(Round to one decimal place.)The volatility of the market portfolio is

nothing%.

(Round to one decimal place.)

b. Calculate the Sharpe ratio of the value stock.

The Sharpe ratio of the value stocks is

nothing.

(Round to two decimal places.)The Sharpe ratio of the growth stocks is

nothing.

(Round to two decimal places.)The Sharpe ratio of the market portfolio is

nothing.

(Round to two decimal places.)c. Does the CAPM hold in this economy?

(Hint:

Is the market portfolio efficient?) (Select the best choice below.)

A.The CAPM does not hold, that is, the market portfolio is efficient, because the market portfolio is not the portfolio with the highest Sharpe ratio.

B.The CAPM holds, that is, the market portfolio is efficient, because the growth portfolio is not the portfolio with the lowest Sharpe ratio.

C.The CAPM holds, that is, the market portfolio is not efficient, because the market portfolio is not the portfolio with the highest Sharpe ratio.

D.The CAPM does not hold, that is, the market portfolio is not efficient, because the market portfolio is not the portfolio with the highest Sharpe ratio.