Assume the risk-free rate is 2% (rf = 2%), the expected return on the market portfolio is 6% (rM = 6%) and the standard deviation of the return on the market portfolio is 15% (M = 15%). (All numbers are annual.) Assume the CAPM holds. (1 point each) 

a. What are the expected returns on securities with the following betas: (i)  = 1.4 (ii)  = 0.6 (iii)  = -0.2 

b. What are the betas of securities with the following expect returns: (i) 10% (ii) 5% (iii) -1% 

c. What are the portfolio weights (in the risk-free asset and the market portfolio) for efficient portfolios (portfolios on the efficient frontier/CML) with expected returns of (i) 4% (ii) 5% (iii) 7% 

d. What are the portfolio weights (in the risk-free asset and the market portfolio) for efficient portfolios (portfolios on the efficient frontier/CML) with standard deviations of (i) 6% (ii) 15% (iii) 21% 

e. For a moment (but just a moment) assume that the CAPM may not hold. A non-dividend paying stock has a current price of $50/share and an expected price in 1 year of $53/share (based on your personal analysis of the company's prospects). (i) If the stock has a beta of 1 ( = 1.0), what is its alpha ()? (ii) What is the alpha () if the beta is 2 ( = 2.0)?

Answer rating: 100% (QA)

a To calculate the expected returns on securities with different betas we can use the Capital Asset Pricing Model CAPM formula Expected Return RiskFree Rate Beta Expected Market Return RiskFree Rate G... View the full answer