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Consider the following forecasts of returns on two risky assets (r 1 and r2), risk-free asset (r f ), and the market (r M ):
Consider the following forecasts of returns on two risky assets (r1 and r2), risk-free asset (rf), and the market (rM):
Compute and report the CML equation. Next, compute the expected returns predicted by the CML for securities 1 and 2. Produce a graph (Graph 2) containing the CML and the two securities and indicate where each of the securities is located relative to the CML. Finally, for each security report whether it is efficient.
Probability T12 State (Scenario) 1 (Extreme boom) 2 (Boom) 3 (Normal growth) 4 (Recession) 5 (Extreme recession)0.15 0.1 0.15 0.4 0.2 9% 5% 4% 6% 8% 7% 12% 10% 300 -9% If 5.66% 5.66% 5.66% 5.66% 5.66% TM 12% 10% 8% 6% -2%
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