Question 1 A Consider the following securities Security Correlation with the Market car index Standard Deviation Historical return 5% -0.40 0.15 0.90 1.00 5% 8% 15% 7% 10% Market Index Risk-free 8% 0.00 1.5% 1) Using the CAPM, calculate the beta of security 1, 2 and 3, and the beta of the market-index and the risk-free rate. [10 marks] 2) Using the CAPM, calculate the expected return of security 1, 2 and 3, and the expected return of the market-index and the risk-free rate. [10 marks) 3) A portfolio manager invests 10% in security 1, 10% in security 2 and 80% in Security 3. a. Calculate the portfolio historical return. b. Using the CAPM, calculate the portfolio beta. c. Using the CAPM, calculate the portfolio expected return. [10 marks] 4) With the above-mentioned portfolio, a portfolio manager achieves a return of 15%. Calculate the Jensen's alpha. (10 marks] Continued on next page. Page 2 of 5 Question 1 A Consider the following securities Security Correlation with the Market car index Standard Deviation Historical return 5% -0.40 0.15 0.90 1.00 5% 8% 15% 7% 10% Market Index Risk-free 8% 0.00 1.5% 1) Using the CAPM, calculate the beta of security 1, 2 and 3, and the beta of the market-index and the risk-free rate. [10 marks] 2) Using the CAPM, calculate the expected return of security 1, 2 and 3, and the expected return of the market-index and the risk-free rate. [10 marks) 3) A portfolio manager invests 10% in security 1, 10% in security 2 and 80% in Security 3. a. Calculate the portfolio historical return. b. Using the CAPM, calculate the portfolio beta. c. Using the CAPM, calculate the portfolio expected return. [10 marks] 4) With the above-mentioned portfolio, a portfolio manager achieves a return of 15%. Calculate the Jensen's alpha. (10 marks] Continued on next page. Page 2 of 5