Question
Suppose you are given the following data. Asset Expected Return Standard Deviation Beta Market 5.8% A 7% 30% 1.25 B 5% 20% Risk-free 1% Assets
Suppose you are given the following data. Asset Expected Return Standard Deviation Beta Market 5.8% A 7% 30% 1.25 B 5% 20% Risk-free 1% Assets A and B are the only risky assets in the economy, i.e., market portfolio consists of Assets A and B. The correlation between assets A and B is 0.25. Based on this information, (a) What is the weight of A in the market portfolio? (4 points) (b) What are the betas of Asset B, market portfolio and the risk-free asset? (6 points) (c) According to CAPM, is Asset A underpriced, overpriced, or correctly priced? (5 points)
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