Assume that the market Capital Asset Pricing Model holds.

Required:

Calculate the market price of risk. (Define all the variables used).

Explain what is meant by "specific risk" within the context of CAPM. 

Explain what is meant by "systematic risk" within the context of CAPM.

Describe how you would calculate beta of a share for a company.

Describe how you would calculate beta of a portfolio.

Explain how you would use the Beta of a portfolio to calculate the expected return for a portfolio. 

Explain why the beta calculated in d) would be inappropriate for practical use.

Transcribed Image Text:

Benny would like to invest a sum of money. He has a choice of three assets. The table below gives the rates of return that can be earned by each of the three assets in the four possible states of the world: Probability State 1 2 3 4 Market capitalization 0.2 0.3 0.1 0.4 Asset 1 5% 5% 5% 5% 10 000 Asset 2 5% 12% 3% 1% 17546 Asset 3 6% 5% 4% 7% 82454 Benny would like to invest a sum of money. He has a choice of three assets. The table below gives the rates of return that can be earned by each of the three assets in the four possible states of the world: Probability State 1 2 3 4 Market capitalization 0.2 0.3 0.1 0.4 Asset 1 5% 5% 5% 5% 10 000 Asset 2 5% 12% 3% 1% 17546 Asset 3 6% 5% 4% 7% 82454

Answer rating: 100% (QA)

To calculate the market price of risk in the context of the Capital Asset Pricing Model CAPM we need to first understand the terms and variables involved 1 RiskFree Rate Rf The rate of return on a ris... View the full answer