Recall the beta-representation of asset return: R = R + i(Rm R) + . In...
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Recall the beta-representation of asset return: R₁ = Rƒ + ßi(Rm − Rƒ) + €¿. In ex- pectation, this becomes E(R₂) = Rƒ + ßi(E(Rm) — Rf) since the residual return € (or idiosyncratic bit of the return not explained by CAPM) is mean zero. Let E(Rm) = 0.1, and Rf = 0.05. Also, let the variance of the market return, o = 0.25. 0.8. Further, Consider a portfolio of two stocks A and B with betas, BA leto² = 0.2 and ² 0.2 and 2 = 0.16 be the residual variance of the two stock returns i.e. the variance of the e bit in the CAPM equation. EB = 1.5 and BB = a) Compute the expected return, portfolio beta (p), and total portfolio variance (0²) for an equally weighted portfolio of A and B. b) Compute the expected return, portfolio beta, and total portfolio variance of an equally weighted portfolio of A and B if it is 50% financed by borrowing (at the risk-free rate)? Recall the beta-representation of asset return: R₁ = Rƒ + ßi(Rm − Rƒ) + €¿. In ex- pectation, this becomes E(R₂) = Rƒ + ßi(E(Rm) — Rf) since the residual return € (or idiosyncratic bit of the return not explained by CAPM) is mean zero. Let E(Rm) = 0.1, and Rf = 0.05. Also, let the variance of the market return, o = 0.25. 0.8. Further, Consider a portfolio of two stocks A and B with betas, BA leto² = 0.2 and ² 0.2 and 2 = 0.16 be the residual variance of the two stock returns i.e. the variance of the e bit in the CAPM equation. EB = 1.5 and BB = a) Compute the expected return, portfolio beta (p), and total portfolio variance (0²) for an equally weighted portfolio of A and B. b) Compute the expected return, portfolio beta, and total portfolio variance of an equally weighted portfolio of A and B if it is 50% financed by borrowing (at the risk-free rate)?
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a For an equally weighted portfolio of stocks A and B the expected return ERp portfolio beta p and total portfolio variance p can be calculated as fol... View the full answer
Related Book For
Statistics For Business Decision Making And Analysis
ISBN: 9780321890269
2nd Edition
Authors: Robert Stine, Dean Foster
Posted Date:
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