Assume the CAPM holds. Consider three feasible portfolios of stocks X, Y and Z with the...
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Assume the CAPM holds. Consider three feasible portfolios of stocks X, Y and Z with the following return characteristics: Portfolio X Y Z Expected return 7.5% 5% 10% Standard deviation 5% 10% 15% a) Explain why beta is the appropriate measure of risk in this world. (5 marks) b) Portfolio Y is known to be uncorrelated with the market. Explain why this property implies that the risk-free rate in the economy is 5%. (5 marks) c) It is known that one of the portfolios X, Y, Z lies on the efficient frontier (which includes the risk-free asset). Which portfolio is efficient? Explain/justify your answer. (5 marks) Assume the CAPM holds. Consider three feasible portfolios of stocks X, Y and Z with the following return characteristics: Portfolio X Y Z Expected return 7.5% 5% 10% Standard deviation 5% 10% 15% a) Explain why beta is the appropriate measure of risk in this world. (5 marks) b) Portfolio Y is known to be uncorrelated with the market. Explain why this property implies that the risk-free rate in the economy is 5%. (5 marks) c) It is known that one of the portfolios X, Y, Z lies on the efficient frontier (which includes the risk-free asset). Which portfolio is efficient? Explain/justify your answer. (5 marks)
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a In the Capital Asset Pricing Model CAPM beta is the appropriate measure of risk because it quantif... View the full answer
Related Book For
Financial management theory and practice
ISBN: 978-1439078099
13th edition
Authors: Eugene F. Brigham and Michael C. Ehrhardt
Posted Date:
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