Question: (b) Suppose the expected return on an asset j is 10%, the expected return on the market portfolio is 12% and the risk free

(b) Suppose the expected return on an asset j is 10%, the expected return on the market portfolio is 12% and the risk free ra

(b) Suppose the expected return on an asset j is 10%, the expected return on the market portfolio is 12% and the risk free rate is 4%. You undertake to run the following regression: R-R = ao+ate The estimated values for ao and a are 1% (0.001) and 5% (0.001) respectively. Stan- dard errors are in parentheses. i. Do you reject CAPM? Discuss. [6 marks] ii. If you were to test this model again, how would you do things differently than was done here? [3 marks]

Step by Step Solution

★★★★★

3.40 Rating (156 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

i Do you reject CAP M Discuss 6 marks ANS WER No the CAP M model is not rejecte... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Abe Shultz, owner of Kits & Pups Grooming, uses the following accounts to record transactions for the month. For each transaction: 1. Prepare a T account for each account listed. 2. Enter a balance...

Suppose the risk-free rate is 4%, the expected return on the market is 12.6%, and a particular stock has a beta of 1.3. What is the required return on this stock? What would be the required return if...

Suppose the average return on an asset is 12 percent and the standard deviation is 20.5 percent Further assume that the returns are normally distributed Use the NORMDIST function in Excel to...

The expected return on a stock is 15% compounded continuously. The continuously compounded risk-free interest rate is 7% and the call elasticity on this stock is 4:5. Find the expected annual...

An object is placed at a distance of 0.25 m in front of a plane mirror. The distance between the object and image will be (a) 0.25 m (b) 1.0 m (c) 0.5 m (d) 0.125 m

Need help with the 70 multiple choice questions for final exam - if you can, please provide explanation for harder questions. A s ae o . s h r d n. . Surname: ______________________ Q1 Given names:...

now//You are asked to price some options on KYC stock. KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent,...

Your end-of-semester assignment is as follows: (a) (i) read the two Economist articles entitled ?Debt is Good for You? (dated 01/25/2001) and ?Debtors? Prison? (dated 02/09/2009), which discuss the...

Problem 1 (10 marks) Three years ago, you purchased a bond for $974.69. The bond had three years to maturity, a coupon rate of 8% paid annually, and a face value of $1,000. Each year you reinvested...

KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...

(iii) calculate the project's terminal cash flows. (4 marks) (iv) calculate the project's Net Present Value (NPV). (3 marks) (v) should the company proceed with the project? Explain your answer. A...

This week, you will complete two separate activities. The first part focuses on the ethics of conducting research with children and adolescents. You will need to review the APA and SRCD websites (see...

Multiple Choice Questions: 1. Which of these has traditionally been one of LCNs most fundamental sources of power? a. Narcotics. b. Loan-harking. c. Labor racketeering. d. None of these. 2. What is...

In 2 0 1 9 , Ernesto Holdings had a return on assets of 1 5 % and a return of equity of 1 7 % ; in 2 0 2 0 those ratios were 1 5 % and 1 6 % respectively, Given this, a reasonable assumption would be...

Consider the following transactions of Sapphire Software: Mar. 31 Recorded cash sales of $230,000, plus sales tax of 7% collected for the state of New Jersey. Apr. 6 Sent March sales tax to the...

Solve each of the following equations. (a) 1/81 = (1/3)n-2 (b) 5/2 = 40 (1/2)n-1

The trend in state income taxation is to move to an apportionment formula that places extra weight on the sales factor. Several states now use sales factor-only apportionment. Explain why this...

Compute each of the following (a) 101.35 (b) 1-1.03-49/0.03 (c) ln 1.025 (d) 1n (3.00e-0.2) (e) 1n (600/1.0611) (f) I 250 107-1 In 250 0.07

Regarding the apportionment formula used to compute state taxable income, does each of the following independent characterizations describe a taxpayer that is based in-state or out-of-state? Explain....

No state allows anyone to marry who is under the age of 18 under any circumstances. Group of answer choices True False

Below is the output from regressing daily excess return of ABC on daily excessreturn of S&P 500.Sample mean of daily excess return of ABC was 0.08% per day, andthesample mean of daily excess returnof...

need these 3 questions solved regarding an assigment inhave in finance thanks 2) In the problem above; let us assume that this investor who demands an expected return of 20% wants to minimize the...

Suppose that the Treasury bill rate is 6% rather than the 3% value assumed in Table 12.1 and the expected return on the market is 10%. Use the betas in that table to answer the following questions....

1 Problem 3: Portfolio Diversification (25 marks) Consider a market with two risky assets A and B. M is the market portfolio. F is the risk- free asset. This is a perfect market with no taxes or...

Hey guys need answers for this assignment thanks for the help FNCE 370v8: Assignment 4 Assignment 4 is worth 5% of your final mark. Complete and submit Assignment 4 after you complete Lesson 12....

please show the detailsthank you 14. Suppose you are a portfolio manager and you plan to form a portfolio that consists of three components, including a risk-free money market security, a stock, and...