In a CAPM world, the risk-free rate is 4% per annum and the expected return on...

  

Transcribed Image Text:

In a CAPM world, the risk-free rate is 4% per annum and the expected return on the market portfolio is 16%. The volatility (i.e. standard deviation) of the return on the market portfolio is 30%. a. Draw both the capital market line and the security market line in this economy. Explain their significance for the identities of optimal in- vestor portfolios and also for the equilibrium risk-return tradeoff for stocks. [Write no more than 1 page] (10 marks) b. If you wished to build an effiicient position with a return volatility of precisely 36%, explain how you would do so. Give an intepretation of the portfolio weights that you would employ and also compute the expected return on this position. (5 marks) c. Stock Z has an equilibrium expected return of 10% and a return volatility of 45%. What is its beta? Interpret the beta and work out, and then interpret, what it implies for the value of the correlation be- tween the returns on the market and the returns on Z. (5 marks) d. Compute the systematic and idiosyncratic risks for Z and interpret each of them. (5 marks) In a CAPM world, the risk-free rate is 4% per annum and the expected return on the market portfolio is 16%. The volatility (i.e. standard deviation) of the return on the market portfolio is 30%. a. Draw both the capital market line and the security market line in this economy. Explain their significance for the identities of optimal in- vestor portfolios and also for the equilibrium risk-return tradeoff for stocks. [Write no more than 1 page] (10 marks) b. If you wished to build an effiicient position with a return volatility of precisely 36%, explain how you would do so. Give an intepretation of the portfolio weights that you would employ and also compute the expected return on this position. (5 marks) c. Stock Z has an equilibrium expected return of 10% and a return volatility of 45%. What is its beta? Interpret the beta and work out, and then interpret, what it implies for the value of the correlation be- tween the returns on the market and the returns on Z. (5 marks) d. Compute the systematic and idiosyncratic risks for Z and interpret each of them. (5 marks)

Answer rating: 100% (QA)

a In a CAPM Capital Asset Pricing Model world the capital market line CML and the security market line SML are important tools for understanding optimal investor portfolios and the riskreturn tradeoff ... View the full answer