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Currently, the market return is 12%, and the risk-free rate is at 5%. There are a number of portfolios in which you are considering investing.
Currently, the market return is 12%, and the risk-free rate is at 5%. There are a number of portfolios in which you are considering investing. Using the following information, provide an answer for the next 4 questions.
Investment (Beta):
A (1.3)
B (1.0)
C (0.70)
D (0.0)
E (2.5)
- Which investment is most risky? Least risky?
- Use the capital asset pricing model to find the required return on each of the investments.
- Using your findings in part 2, draw the security market line.
- On the basis of your findings in part 3, what relationship exists between risk and return? Carefully explain.
- Consider a portfolio composed of investments A to E, with equal shares .(i.e. 20% each one). What would be the beta of that portfolio?
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