Assume the security market line given below. Assume that analysts have estimated the beta on two stocks as follows: βx = 0.5 and βy = 2. What must the expected return on the two securities be in order for them to be a good purchase?
Answer to relevant QuestionsAssume that over some period, a CAPM was estimated. The results are shown below. Assume that over the same period, two mutual funds had the following results: What can be said about the fund performance? If the following assets are correctly priced on the security market line, what is the return of the market portfolio? What is the risk-free rate? Assume that returns are generated as follows: Where C is the rate of change in interest rates. Derive a general equilibrium relationship for security returns. Assume the post tax CAPM holds but the Sharpe-Lintner model is tested. What would you expect the empirical results to look like? It has been suggested that the EMH could be used to determine whether you have monopoly access to a type of information. Explain how this might be done.
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