All risky assets available can be classified into one of two broad portfolios: Equity or Debt....

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All risky assets available can be classified into one of two broad portfolios: Equity or Debt. Given current market prices and shares/units outstanding, the total market capitalization of Equity risky assets is $60 trillion and the total market capitalization of Debt risky assets is $40 trillions. Consider the following scenarios for the one-year holding period return on Equity and Debt. The risk-free rate is 4% per year. Scenario Recession Normal Boom Probability 0.20 0.60 0.20 Return on Equity Risky Assets -15% 8% 30% a) Calculate the expected returns on Equity and Debt. b) Calculate the standard deviations of returns on Equity and Debt. c) Calculate the correlation of returns between Equity and Debt. Return on Debt Risky Assets 0% 5% 6% d) What are the weights of Equity and Debt on the Market Portfolio? e) What is the beta of Equity? What is the beta of Debt? f) Are expected returns on Equity and Debt Risky assets consistent with the CAPM? Why? All risky assets available can be classified into one of two broad portfolios: Equity or Debt. Given current market prices and shares/units outstanding, the total market capitalization of Equity risky assets is $60 trillion and the total market capitalization of Debt risky assets is $40 trillions. Consider the following scenarios for the one-year holding period return on Equity and Debt. The risk-free rate is 4% per year. Scenario Recession Normal Boom Probability 0.20 0.60 0.20 Return on Equity Risky Assets -15% 8% 30% a) Calculate the expected returns on Equity and Debt. b) Calculate the standard deviations of returns on Equity and Debt. c) Calculate the correlation of returns between Equity and Debt. Return on Debt Risky Assets 0% 5% 6% d) What are the weights of Equity and Debt on the Market Portfolio? e) What is the beta of Equity? What is the beta of Debt? f) Are expected returns on Equity and Debt Risky assets consistent with the CAPM? Why?

Answer rating: 100% (QA)

Calculations for Equity and Debt Risky Assets a Expected Returns Equity020 15 060 8 020 30 52 Debt020 0 060 6 020 6 36 b Standard Deviations of Return... View the full answer