Gros Beta is a hedge fund. He identified three high beta stocks, with betas of 2.6, 3.0 and 3.4, respectively, and invested in these stocks with an equal proportion. The standard deviation from Gros Beta is 70%. The expected return on the market is 15%, with a standard deviation of 20%. The risk-free rate is 5%. Suppose the CAPM applies (i.e. Big Beta has an alpha of zero).

a- Build an optimal portfolio that has the same standard deviation as Big Beta. (Specify the proportion of each of the assets that make up your optimal portfolio. Suppose you can borrow or lend at the rate without risk.)

b- What is the expected return on the portfolio you have built in a)?

c- Build an optimal portfolio that has the same expected return as Big Beta. (Specify the proportion of each of the assets that make up your optimal portfolio. Suppose you can borrow or lend at the rate without risk.)

d- What is the standard gap in the portfolio you built in c)?

e- On a graph of expected returns (y axis) on the standard deviation (axis x), trace the portfolios you found in a), c), the market portfolio, Gros Beta, and the Capital Market Line (CML- or Market Line

Answer rating: 100% (QA)

To solve this problem we can use the principles of the Capital Asset Pricing Model CAPM to determine the optimal portfolios The CAPM states that the e... View the full answer