Question
Imagine you are choosing between two portfolios, and you believe the CAPM is the correct pricing model. Portfolio A has a market beta of A
Imagine you are choosing between two portfolios, and you believe the CAPM is the correct pricing model. Portfolio A has a market beta of A = 0.6. Portfolio B has a market beta of B = 0.9. The average excess return for A is 6%, while for B the average excess return is 8.5%. The average excess return on the market is 7%. The standard deviation of As return is 12%, and for B is 18%.
(a) Which portfolio, A or B, has a higher alpha?
(b) Which portfolio has a higher Sharpe ratio?
(c) If you could borrow as much as you want at the risk-free rate (say rf = 1%), and you wanted your investment portfolio to have a market beta of p = 1, how would you construct such a portfolio? Explain
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