Question 3 (Essential to cover: a to c)

Consider a market that consists of only two assets, A and B.

denotes the correlation coefficient and denotes the assets weight in the market portfolio. =3%;( )=13%.

!%

1. What is the variance of the market portfolio?

2. What are the covariances with the market portfolio of the two assets?

3. What are the CAPM s of the two assets and the market portfolio?

4. What are the reward-to-risk (use variance as risk) ratios of the two assets and the market portfolio?

5. What are the contributions of each asset to the market excess return, ( ) ? %!

6. What are the contributions of each asset to the market variance, & ? %

7. What are the contributions of each asset to the reward-to-risk ratio of the market?

8. Suppose you had found that the contribution of asset A to reward-to-risk ratio of the market was 1 and that the contribution of asset of B to the same ratio was 0.8. How could you construct a portfolio that beats the market? Could this be an equilibrium?

Question 3 (Essential to cover: a to c) Consider a market that consists of only two assets, A and B. Asset o 02 A B 0.4 0.6 0.2 0.5 0.04 0.25 Pi, A 1 0.3 Pi,B 0.3 1 p denotes the correlation coefficient and w denotes the asset's weight in the market portfolio. re = 3%; E(rm) = 13%. a. What is the variance of the market portfolio? b. What are the covariances with the market portfolio of the two assets? c. What are the CAPM Bs of the two assets and the market portfolio? d. What are the reward-to-risk (use variance as risk) ratios of the two assets and the market portfolio? e. What are the contributions of each asset to the market excess return, E(rm) rf? f. What are the contributions of each asset to the market variance, oi? g. What are the contributions of each asset to the reward-to-risk ratio of the market? h. Suppose you had found that the contribution of asset A to reward-to-risk ratio of the market was 1 and that the contribution of asset of B to the same ratio was 0.8. How could you construct a portfolio that beats the market? Could this be an equilibrium? Question 3 (Essential to cover: a to c) Consider a market that consists of only two assets, A and B. Asset o 02 A B 0.4 0.6 0.2 0.5 0.04 0.25 Pi, A 1 0.3 Pi,B 0.3 1 p denotes the correlation coefficient and w denotes the asset's weight in the market portfolio. re = 3%; E(rm) = 13%. a. What is the variance of the market portfolio? b. What are the covariances with the market portfolio of the two assets? c. What are the CAPM Bs of the two assets and the market portfolio? d. What are the reward-to-risk (use variance as risk) ratios of the two assets and the market portfolio? e. What are the contributions of each asset to the market excess return, E(rm) rf? f. What are the contributions of each asset to the market variance, oi? g. What are the contributions of each asset to the reward-to-risk ratio of the market? h. Suppose you had found that the contribution of asset A to reward-to-risk ratio of the market was 1 and that the contribution of asset of B to the same ratio was 0.8. How could you construct a portfolio that beats the market? Could this be an equilibrium