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Suppose the risk free rate is re = 2% and the expected return on the market is I'm = 6%. Using return data on two
Suppose the risk free rate is re = 2% and the expected return on the market is I'm = 6%. Using return data on two assets, asset 1 and asset 2, as well as the market, your investment bank has computed the variances and covariances summarized in the table below: 01 = 0.25 61,2 = 0.10 01.m = 0.08 62,1 = 0.10 0% = 0.09 2.m = 0.03 Om, 1 = 0.08 Om,2 = 0.03 om = 0.04 where o; is the variance of asset i and Oij is the covariance of asset i and asset j. a.) What are the expected returns on asset 1 and asset 2 according to the CAPM? b.) What is the expected return and the standard deviation of a portfolio that has 40% invested in asset 1 and 60% in asset 2? c.) What is the beta of this portfolio (Bp,m)? d.) Assume the CAPM holds. Construct an efficient portfolio that has the same standard deviation as the portfolio in (b). i) what are the portfolio weights of the market asset and the Rf asset? ii) What is the expected return of this portfolio
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