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Please answer questions A, B, C, D, and E below. Portfolio Theory/CAPM: Suppose that the risk free rate is 2% and the expected rate of

Please answer questions A, B, C, D, and E below.

Portfolio Theory/CAPM: Suppose that the risk free rate is 2% and the

expected rate of return on the market is 8%. Suppose also that the

volatility of the market return is 18%. Consider Wal-Mart (WMT) stock.

It has a beta of 0.30 and a volatility of 36%.

a. According to the CAPM, what is the expected return

of Wal-mart?

b. Find the Sharpe ratio for the market.

c. Based on (a), find the expected return and volatility

of a 50-50 portfolio of Wal-Mart and the risk-free asset.

d. Again based on (a), do we have enough information

to find the expected return and volatility of a 50-50 portfolio of

Wal-Mart and the market portfolio?

e. Your friend from UCLA says that since WMT has a

beta less than 1, it has low exposure to market risk. He thinks

this means that WMT should have a lower volatility than the

market. Why is he wrong?

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