Suppose that asset class B in Question 1 is the global investable market portfolio and that the market for asset class A is highly liquid and perfectly integrated. Further suppose that the risk-free rate is 2.36%. 

Demonstrate the use of international CAPM to estimate the expected return on asset class A in Question 1. State your assumptions, if necessary.

 

You are given the following information on forecasted returns: State of Economy Boom Normal Recession Probability 0.2 0.4 0.3 Returns Asset Class A 11% 14% -5% Asset Class B 22% 16% -8% You would like to construct a portfolio with 30% invested in asset class A and the rest invested in asset class B.