Assume the risk-free rate is 2% (rf = 2%), the expected return on the market portfolio is
Question:
Assume the risk-free rate is 2% (rf = 2%), the expected return on the market portfolio is 6% (rM = 6%) and the standard deviation of the return on the market portfolio is 15% (M = 15%). (All numbers are annual.) Assume the CAPM holds. (1 point each)
a. What are the expected returns on securities with the following betas: (i) = 1.4 (ii) = 0.6 (iii) = -0.2
b. What are the betas of securities with the following expect returns: (i) 10% (ii) 5% (iii) -1%
c. What are the portfolio weights (in the risk-free asset and the market portfolio) for efficient portfolios (portfolios on the efficient frontier/CML) with expected returns of (i) 4% (ii) 5% (iii) 7%
d. What are the portfolio weights (in the risk-free asset and the market portfolio) for efficient portfolios (portfolios on the efficient frontier/CML) with standard deviations of (i) 6% (ii) 15% (iii) 21%
e. For a moment (but just a moment) assume that the CAPM may not hold. A non-dividend paying stock has a current price of $50/share and an expected price in 1 year of $53/share (based on your personal analysis of the company's prospects). (i) If the stock has a beta of 1 ( = 1.0), what is its alpha ()? (ii) What is the alpha () if the beta is 2 ( = 2.0)?
Financial management theory and practice
ISBN: 978-1439078099
13th edition
Authors: Eugene F. Brigham and Michael C. Ehrhardt