Question
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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