Name: 1. Suppose the CAPM holds and that asset A has a beta of 0.5 and asset B has a beta of 2 the expected return on A is 10% and the expected return on B is 25% what must be the (a) the risk free rate? (b) expected return on the market? 2. Suppose there are two independent risk factors governing securities returns according to the two factor APT. The risk-free rate is 10%. The following well-diversified portfolios exist: beta with respect to factor 1 beta with respect to factor 2 Expected Return Portfolio #1 Portfolio #2 (a) What are the expected returns on each of the two risk factors in this economy? 2 25% 25% (b) Suppose another portfolio has a beta with respect to the first factor of 1, a beta with respect to the second risk factor of 1, and an expected return of 14% Is this consistent with the APT? (Explain your answer) If not, what asset you would want to short in arn arbitrage portfolio? 3. Assume we are in a CAPM world. Tell me if each of the following scenarios is possible and why? a) Security E(r) A 30 15 B 25 20 b) Security Beta F(r) A 1.5 25 B 5 Mrkt 1 15 E(r) 0 10 10 15 2030 c) Security Market d) Security Beta E(r) A 2 15 B 1.5 20