The following data are provided for the market index return and for Coca Cola, as a...

 

Transcribed Image Text:

The following data are provided for the market index return and for Coca Cola, as a function of different states of the economy State 1 23 4 Probability 0.1 0.2 0.3 0.4 Market return Coca Cola return -0.40 0.15 0.10 0.50 -0.20 0.05 0.15 0.30 The current riskless rate is 6% and will remain unchanged over the next period. a) Compute the expectation and the variance of the market return. b) Compute the expectation and the variance of Coca Cola and its covariance with the market return. c) What is the required return on Coca Cola? Is Coca Cola under-or overpriced? d) You are holding a portfolio consisting of 50% of Coca Cola and 50% of Microsoft, and its covariance with the market is equal to 3.11 10-2. What is the 3 of the portfolio? e) Would you invest in this portfolio if the expected return on Microsoft is 16%. What would be your answer if the riskless rate would be 3%? f) According to the separation theorem, state the equation for the Capital Market Line. Explain. g) Describe how to test CAPM and explain two of the main findings from empirical studies about CAPM. (Total for Question 27: 25 marks) 2 marks 3 marks 3 marks 5 marks 5 marks 4 marks 3 marks The following data are provided for the market index return and for Coca Cola, as a function of different states of the economy State 1 23 4 Probability 0.1 0.2 0.3 0.4 Market return Coca Cola return -0.40 0.15 0.10 0.50 -0.20 0.05 0.15 0.30 The current riskless rate is 6% and will remain unchanged over the next period. a) Compute the expectation and the variance of the market return. b) Compute the expectation and the variance of Coca Cola and its covariance with the market return. c) What is the required return on Coca Cola? Is Coca Cola under-or overpriced? d) You are holding a portfolio consisting of 50% of Coca Cola and 50% of Microsoft, and its covariance with the market is equal to 3.11 10-2. What is the 3 of the portfolio? e) Would you invest in this portfolio if the expected return on Microsoft is 16%. What would be your answer if the riskless rate would be 3%? f) According to the separation theorem, state the equation for the Capital Market Line. Explain. g) Describe how to test CAPM and explain two of the main findings from empirical studies about CAPM. (Total for Question 27: 25 marks) 2 marks 3 marks 3 marks 5 marks 5 marks 4 marks 3 marks

Answer rating: 100% (QA)

a To compute the expectation and variance of the market return we use the following formulas Expectation Expected Market Return ERm Probability Market Return Variance Market Return VarRm Probability M... View the full answer