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Problem 2.3. Consider the following information about investments A, B, and C: Investment A B Standard Deviation 40% 60% 50% Expected Return 8% 12% 10%
Problem 2.3. Consider the following information about investments A, B, and C: Investment A B Standard Deviation 40% 60% 50% Expected Return 8% 12% 10% Beta 1.2 2 1.8 The risk-free rate is 2% and the market risk premium is 5%. The standard deviation of the market portfolio is 25%. The correlation between investments A and B is 0.25. a. What is the standard deviation of a portfolio D that invests equal amounts in A and B? 4 points 4 b. Verify CAPM equation to determine if any of investments A, B, or C are mispriced. points c. Calculate Sharpe ratios to determine if any of investments A, B, C, or D is an efficient portfolio. 4 points
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