El Papalote is a multinational company that has been selling hang gliders since 1995. Its expected return is 9.50%, and its volatility is 30%. The global market port folio has an expected return of 7% and a volatility of 20%. The correlation between El Papalote and the global market portfolio is 0.8. The risk-free rate is 2%. All returns and volatilities are in domestic terms.

(a) Suppose you hold the global market portfolio only and you want to improve the Sharpe ratio of your investments. What is the hurdle rate for El Papalote?

(b) What is El Papalote's alpha based on the World CAPM?

(c) Now suppose regressing El Papalote's return on the global market return and the global HML factor gives betas of 1.1 and 0.8, respectively, and the HML premium is 4%. Based on the Fama-French two-factor model, what is El Papalote's required rate of return? Is it a value or growth company?

(d) Now suppose you invests 80% in the global portfolio and 20% in El Papalote. What is the portfolio volatility?

Answer rating: 100% (QA)

a The hurdle rate for El Papalote is the riskfree rate plus the product of the market risk premium a... View the full answer