Let's assume that current risk-free rate is 3.5%, expected market return is 18% and standard deviation...

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Let's assume that current risk-free rate is 3.5%, expected market return is 18% and standard deviation of a market portfolio is 8%. Suppose there are two portfolios: • Lending (non-leveraged) Portfolio Beta with standard deviation 4% • Borrowing (leveraged) Portfolio Lambda with standard deviation 13% a. a. Calculate the return of portfolio Beta and Lambda. (2 marks) b. Calculate for each portfolio the weights invested in risk free and risky assets. (2 marks) Capital Asset Pricing Model CAPM (this is the equation of the security market line) Q1#. Assume the following assets are correctly priced according to the Security Market Line. B₁ = 0.3 B₂ = 1.3 E(R₂) = 5% E(R₂) = 15% 1. Derive the Security Market Line. (2 marks) 2. Calculate the expected return of the market. 3. What is the expected return on an asset with a beta of 0.9? Q2# CAPM Given the equation of SML line: E(R)= 0.07 + 0.098,. What will be expected return of a stock with B of 2.0? Suppose, the current market price of the stock is AED18. What will be the forecasted price of the stock after one year? Let's assume that current risk-free rate is 3.5%, expected market return is 18% and standard deviation of a market portfolio is 8%. Suppose there are two portfolios: • Lending (non-leveraged) Portfolio Beta with standard deviation 4% • Borrowing (leveraged) Portfolio Lambda with standard deviation 13% a. a. Calculate the return of portfolio Beta and Lambda. (2 marks) b. Calculate for each portfolio the weights invested in risk free and risky assets. (2 marks) Capital Asset Pricing Model CAPM (this is the equation of the security market line) Q1#. Assume the following assets are correctly priced according to the Security Market Line. B₁ = 0.3 B₂ = 1.3 E(R₂) = 5% E(R₂) = 15% 1. Derive the Security Market Line. (2 marks) 2. Calculate the expected return of the market. 3. What is the expected return on an asset with a beta of 0.9? Q2# CAPM Given the equation of SML line: E(R)= 0.07 + 0.098,. What will be expected return of a stock with B of 2.0? Suppose, the current market price of the stock is AED18. What will be the forecasted price of the stock after one year?

Answer rating: 100% (QA)

SOLUTION a To calculate the return of portfolio Beta and Lambda we need to use the Capital Asset Pricing Model CAPM Return of Portfolio Beta The retur... View the full answer