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The expected return of the ABC Index, which you can assume is the tangency portfolio, is 16 per cent and has a standard deviation of
The expected return of the ABC Index, which you can assume is the tangency portfolio, is 16 per cent and has a standard deviation of 25 per cent per year. The expected return of DEF is unknown, but it has a standard deviation of 20 per cent per year and a covariance with the ABC Index of 0.10. If the risk-free rate is 6 per cent per year: i. Compute DEF's beta. (3 marks) ii. What is DEF's expected return given the beta computed in part a? (3 marks) iii. If XYX Bank has half the expected return of DEF, then what is XYZ Bank's beta? iv. What is the beta of the following portfolio? (2 marks) 0.25 in DEF 0.10 in XYZ Bank 0.75 in the ABC Index portfolio 0.20 in AA (where AA is 0.80) 0.10 in the risk-free asset. V. What is the expected return of the portfolio in part d? (2 marks)
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