There are 3 risky assets, and one risk-free. A regression of asset returns on the market...

 

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There are 3 risky assets, and one risk-free. A regression of asset returns on the market portfolio has yielded the following results: Asset 1: 7₁,trp=0.09 +1.5*(rm,t - RF) + €1,t Asset 2: 12,trp = 0.05 +0.4* (rm,t - RF) + €2,t Asset 3: 13,t - TF = 0.1 +1.2* (rm,t - RF) + €3,t You have estimated the expected returns on the assets as ₁ = 0.2, 2 = 0.14, and μ3 = 0.16, respectively. 1. Explain, in as much detail as you can, how to estimate the Securities Markets Line (SML) from this information. Provide the necessary calcu- lations. Draw a sketch of the SML, indicating within this the locations of the three assets and the market portfolio. 2. What inference (if any) would you draw from this estimation about the validity of the CAPM? Carefully explain your argument (s). 3. What inference (if any) would you draw regarding the performance of port- folios formed from the three assets? Carefully explain your argument(s). 4. Suppose now there are 4 investors, each with $1,000 to invest: . The first invests all their wealth in the risk-free asset. • The second invests all their wealth in the market portfolio. • The third splits their wealth equally between the risk-free asset and the market portfolio. • The fourth borrows an additional $1,000 at the risk-free rate, and invests all available funds in the market portfolio. For each of these investors, what are the 3s and expected returns on their portfolios (expressed as functions of RF and E(TM))?. There are 3 risky assets, and one risk-free. A regression of asset returns on the market portfolio has yielded the following results: Asset 1: 7₁,trp=0.09 +1.5*(rm,t - RF) + €1,t Asset 2: 12,trp = 0.05 +0.4* (rm,t - RF) + €2,t Asset 3: 13,t - TF = 0.1 +1.2* (rm,t - RF) + €3,t You have estimated the expected returns on the assets as ₁ = 0.2, 2 = 0.14, and μ3 = 0.16, respectively. 1. Explain, in as much detail as you can, how to estimate the Securities Markets Line (SML) from this information. Provide the necessary calcu- lations. Draw a sketch of the SML, indicating within this the locations of the three assets and the market portfolio. 2. What inference (if any) would you draw from this estimation about the validity of the CAPM? Carefully explain your argument (s). 3. What inference (if any) would you draw regarding the performance of port- folios formed from the three assets? Carefully explain your argument(s). 4. Suppose now there are 4 investors, each with $1,000 to invest: . The first invests all their wealth in the risk-free asset. • The second invests all their wealth in the market portfolio. • The third splits their wealth equally between the risk-free asset and the market portfolio. • The fourth borrows an additional $1,000 at the risk-free rate, and invests all available funds in the market portfolio. For each of these investors, what are the 3s and expected returns on their portfolios (expressed as functions of RF and E(TM))?.

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Estimating the Security Market Line SML Heres how to estimate the SML and analyze the information provided Calculations Market Risk Premium MRP We don... View the full answer