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Please Provide Solution for part c and d only. Question 7 In a CAPM world, the risk-free rate is 4% per annum and the expected
Please Provide Solution for part c and d only.
Question 7 In a CAPM world, the risk-free rate is 4% per annum and the expected return on the market portfolio is 16%. The volatility (i.e. standard deviation) of the return on the market portfolio is 30%. a. Draw both the capital market line and the security market line in this economy. Explain their significance for the identities of optimal in- vestor portfolios and also for the equilibrium risk-return tradeoff for stocks. [Write no more than 1 page] (10 marks) b. If you wished to build an efficient position with a return volatility of precisely 36%, explain how you would do so. Give an intepretation of the portfolio weights that you would employ and also compute the expected return on this position. (5 marks) c. Stock Z has an equilibrium expected return of 10% and a return volatility of 45%. What is its beta? Interpret the beta and work out, and then interpret, what it implies for the value of the correlation be- tween the returns on the market and the returns on Z. (5 marks) d. Compute the systematic and idiosyncratic risks for Z and interpret each of them
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