# 1. Assume that the CAPM holds. Portfolio a Ep Security

1.
Assume that the CAPM holds.
Portfolio a
Ep
Security k
M
(Market Portfolio)
Portfolio q
-Security j
Security i
R-
1.1. Indicate whether the following statements are true or false based on what
you can infer from the graph above without scaling it.
(a). Portfolio q has no diversifiable risk.
(b). BaM = 1.
(c). Portfolio q is a portfolio in which we have invested positive amounts
both in the risk free asset and in the market portfolio.
(d). Security i has no systematic risk.
(e).
O aM = 0a *oM.
%3D
(f).
OkM >o
M
(g). 0< PaM <1
1.2. Work out answers to the following based on the graph above.
(h). You are given that EM -R, = 4*(E; - R,). What percentage of the
total risk of Security j as measured by the variance on returns on
Security j can be diversified away?
(i).
You are given that o = 3*oM. What is the correlation between
returns on Security k and those on the market portfolio?
(1). You are given that Security h lies at the intersection of a horizontal line
going through Security j and a vertical line going through Security k.
What percentage of the total risk of Security h as measured by the
variance on returns on Security h cannot be diversified away?
(k). You are given that E. - R, = 2* (E,-R,). What is the ratio of the
dollar amount borrowed on margin to the total amount invested in the
market portfolio in Portfolio a?