The market portfolio of a certain country has a mean return of 10% and a standard...

 

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The market portfolio of a certain country has a mean return of 10% and a standard deviation of the return of 20%. Fund X in this market earns a mean return of 6% and fund Y earns a mean return of 11.2%. The risk-free rate of this economy is 4% per annum effective. Assume that the Capital Asset Pricing Model (CAPM) holds. (a) Calculate the betas of funds X and Y. (b) Analysts estimate that fund X's returns have a standard deviation of 20% (same as the market portfolio), and fund Y's returns have a standard deviation of 30%. i. Calculate the Sharpe ratios of funds X and Y. ii. Calculate the proportions of the variances of fund X's and fund Y's returns that arise from specific risks. Which fund has more specific risks as a proportion of the total variance? (c) Asset Z, an asset in this market, is currently selling for $75. It is given that the expected value of asset Z one year from now is $3 higher than the value of a risk-free investment of the same amount ($75) one year from now. Calculate the covariance between the returns of asset Z and the market portfolio. The market portfolio of a certain country has a mean return of 10% and a standard deviation of the return of 20%. Fund X in this market earns a mean return of 6% and fund Y earns a mean return of 11.2%. The risk-free rate of this economy is 4% per annum effective. Assume that the Capital Asset Pricing Model (CAPM) holds. (a) Calculate the betas of funds X and Y. (b) Analysts estimate that fund X's returns have a standard deviation of 20% (same as the market portfolio), and fund Y's returns have a standard deviation of 30%. i. Calculate the Sharpe ratios of funds X and Y. ii. Calculate the proportions of the variances of fund X's and fund Y's returns that arise from specific risks. Which fund has more specific risks as a proportion of the total variance? (c) Asset Z, an asset in this market, is currently selling for $75. It is given that the expected value of asset Z one year from now is $3 higher than the value of a risk-free investment of the same amount ($75) one year from now. Calculate the covariance between the returns of asset Z and the market portfolio.

Answer rating: 100% (QA)

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