Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Consider an economy with only two risky assets: Asset E(R) o A 0.12 0.3 B 0.15 0.4 The risk-free rate is 5% and the correlation

Consider an economy with only two risky assets:

Asset E(R) o

A 0.12 0.3

B 0.15 0.4

The risk-free rate is 5% and the correlation between A and B is 0.3. Also, assume that investors are mean-variance optimizers.

1. What is the optimal risky portfolio?

Sharpe ratio A= (0.12-0.05)/0.3= 0.23

Sharpe ratio B= (0.15-0.04)/0.4= 0.275 Asset B is the optimal risky Portfolio

2. What is the beta of asset A with the market portfolio? What is the beta of asset B?

3. Calculate the beta of the market portfolio by taking the weighted average of the beta of asset A and the beta of asset B (using the portfolio weights of the optimal risky portfolio as weights). Does this value make sense?

4. Suppose that the optimal risky portfolio constructed in part (a) is the market portfolio, Would an asset with a beta of 1, an expected return of 15%, and a volatility of 40% be consistent with the CAPM?

Answer all please, will give thumbs up

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Exploring Public Relations And Management Communication

Authors: Ralph Tench, Stephen Waddington

5th Edition

1292321741, 9781292321745

More Books

Students also viewed these Finance questions

Question

Write each series using summation notation. -2 + 4 - 8 + 16 - 32

Answered: 1 week ago

Question

Verify the statement made in the remark following Example 10.2.

Answered: 1 week ago

Question

=+1. Who is responsible for CSRfirms or their stakeholders? Why?

Answered: 1 week ago