Question
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
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