Question: Assuming CAPM holds: Given: Security A , B, Market Portfolio E(R) = 0.05, 0.11, 0.08 Std Deviation A and B, Market = 0.25, 0.18, 0.15

Assuming CAPM holds:

Given: Security A , B, Market Portfolio E(R) = 0.05, 0.11, 0.08

Std Deviation A and B, Market = 0.25, 0.18, 0.15

Beta A and B, Market = 0.5, 1.5, 1.0 a) Assume the risk-free rate is 3%.

a)Find the exact composition of the mean-variance efficient portfolio (i.e. comprised of the risk-free asset and the market portfolio) that has an expected return of 12%.

b)Assume the risk-free rate is 3%. Find the expected return of the mean-variance efficient portfolio (i.e. comprised of the risk-free asset and the market portfolio) that has a standard deviation of 0.2.

c)Ignore answers of a and b. Assume the risk-free rate is 3%. Suppose there exists another Security C with an expected return of 15% and a beta of 2.3. Is Security C overvalued or undervalued relative to the CAPM?

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