In Simpleland, there are only two risky assets in the market, A and B. The information...

 

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In Simpleland, there are only two risky assets in the market, A and B. The information and CAPM estimates of A and B are shown in the following table: A 100 Million 0.09 Market Capitalisation ($) Variance (²) Covariance between A and B Expected Return on Market Risk free rate 0.2 20% 10% a) What is the expected return of A and B under CAPM? [5] B 400 Million 0.01 The manager believes that in the near future, B will outperform A by 5% with uncertainty measured in variance 0.0005. He has also assigned the error of estimating the above CAPM model in terms of variance to be 0.01, i.e. T = 0.01. In Simpleland, there are only two risky assets in the market, A and B. The information and CAPM estimates of A and B are shown in the following table: A 100 Million 0.09 Market Capitalisation ($) Variance (²) Covariance between A and B Expected Return on Market Risk free rate 0.2 20% 10% a) What is the expected return of A and B under CAPM? [5] B 400 Million 0.01 The manager believes that in the near future, B will outperform A by 5% with uncertainty measured in variance 0.0005. He has also assigned the error of estimating the above CAPM model in terms of variance to be 0.01, i.e. T = 0.01.

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To calculate the expected return of assets A and B under the CAPM we use the fol... View the full answer