Answered step by step
Verified Expert Solution
Question
1 Approved Answer
(13 marks) Assume that you currently have 50% of your wealth in a risk-free asset and 50% in the two mutual funds as shown below,
(13 marks) Assume that you currently have 50% of your wealth in a risk-free asset and 50% in the two mutual funds as shown below, which you may assume are efficiently and correctly priced: Fund Expected Return on Beta of Fund Stock (%) % of Wealth Invested in Fund A 12.6 0.90 20 B 17.1 1.40 30 Required: (be sure to show your work) (a) Using the CAPM, and assuming the market is in equilibrium, calculate the risk-free rate and the expected return on the market portfolio. (4 marks) Notwithstanding your answers in part (a), use rp = 4% and E(rm) = 12% for parts (b) through (d). (b) Calculate the expected return on your portfolio. (3 marks) Calculate the beta of your portfolio. (3 marks) (c) (d) You want to invest in only the risk-free asset and the market portfolio. You want an expected rate of return of 10%. How would you allocate your wealth between the risk-free asset and the market portfolio? (3 marks) (13 marks) Assume that you currently have 50% of your wealth in a risk-free asset and 50% in the two mutual funds as shown below, which you may assume are efficiently and correctly priced: Fund Expected Return on Beta of Fund Stock (%) % of Wealth Invested in Fund A 12.6 0.90 20 B 17.1 1.40 30 Required: (be sure to show your work) (a) Using the CAPM, and assuming the market is in equilibrium, calculate the risk-free rate and the expected return on the market portfolio. (4 marks) Notwithstanding your answers in part (a), use rp = 4% and E(rm) = 12% for parts (b) through (d). (b) Calculate the expected return on your portfolio. (3 marks) Calculate the beta of your portfolio. (3 marks) (c) (d) You want to invest in only the risk-free asset and the market portfolio. You want an expected rate of return of 10%. How would you allocate your wealth between the risk-free asset and the market portfolio
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