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Portfolios X and Y are located on the Capital Market Line. The annual expected return and standard deviation of X, Y, and their market betas
Portfolios X and Y are located on the Capital Market Line. The annual expected return and standard deviation of X, Y, and their market betas are shown in the following table: Y 0.056 X Expected return 0.092 Standard deviation 0.2 Beta 1.2 0.1 ? (a) What is the standard deviation of the market portfolio? I I (4 marks) (b) What is the slope of the CML? (4 marks) (c) What is the market risk premium? (5 marks) (d) There is another well-diversified portfolio, Z, which has an annual expected return of 0.11 and a beta of 1.4. Compute the alpha for Z. (5 marks) (e) Is there an arbitrage opportunity by using X, Y, and Z, assuming short selling is allowed? If yes, describe your arbitrage strategy, by using $300 of Z. (7 marks) (Total: 25 marks)
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