Question
Suppose the economy can be in one of the following two states: state 1 and state 2. Each state can occur with an equal probability.
Suppose the economy can be in one of the following two states: state 1 and state 2. Each state can occur with an equal probability. The annual return on the market and a certain Security X in the two states are as follows: Market: at the end of the year, the market is expected to yield a return of 15% in state 1 and a return of -5% in state 2. Security X: at the end of the year, the security is expected to yield a return of -7.5% in state 1 and a return of 2.5% in state 2.
Furthermore, assume that the annual risk-free rate is 0%. a) Calculate the beta of Security X relative to the market. b) Calculate the alpha (i.e., the Jensens alpha) of Security X. c) Draw the security market line (SML) and identify Jensens alpha on the SML graph. Please label the axes and all points (including the market portfolio, the risk-free security, and Security X) in the graph.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started