Note: this assignment is a continuation of Assignments $06($A$)$ and $06($B$).$ Here are some of the answers there that you need to use in this assignment: E$($RA$)=5\mathrm{.}70\%,\backslash$sigma A $=5\mathrm{.}06\%,$ E$($RM$)=3\mathrm{.}80\%,\backslash$sigma M $=3\mathrm{.}89\%$; $\backslash$sigma A$,$M $=18\mathrm{.}34($or $0\mathrm{.}001834.$ In order to correctly do this part, you will need to first study the Word file on portfolio theory, CML$,$ and SML$.$

The following is a probability distribution for returns on securities A and M:

State Probability RA RM

$110\%15\%12\%$

$240\%8\%6\%$

$340\%4\%1\%$

$410\%-6\%-2\%$

Assume that security M is actually the market portfolio. Assume that the risk$-$free rate, RF is $2\mathrm{.}60\%.$ Assume an investor divides his available investable capital of $$200,000$ between F and M such that $$50,000$ is in F and the rest is in M$.$

Using the portfolio return equation, calculate the expected return on the combined portfolio, C t$3\mathrm{.}50\%$

$3\mathrm{.}20\%$

$6\mathrm{.}40\%$

$2\mathrm{.}90\%$

Use the portfolio risk equation, calculate the standard deviation of portfolio, C formed in part a $($again no CML yet$)\mathrm{.}3\mathrm{.}89\%$

$4\mathrm{.}48\%$

$2\mathrm{.}92\%$

$4\mathrm{.}18\%$

Now, use the CML relationship and assume that your answer to question $1$ above $3\mathrm{.}96\%$ and to question $02$ is $4\mathrm{.}40\%,$ calculate the required rate of return on the combined portfolio, C$\mathrm{.}4\mathrm{.}30\%$

$4\mathrm{.}09\%$

$7\mathrm{.}10\%$

$3\mathrm{.}96\%$

If you calculate the expected return on C using the portfolio equation as we did in question $01$ and then using the CML as we did in question $03,$ we should have $...$

The first should be higher than the second because of diversification effect

The two are equal since the two models are compatible with one another

The first should be lower than the second because of diversification effect

The first should be either higher or lower depending on the parameters of each

Calculate the beta of asset, A$,$ given that M is the market portfolio.

$1\mathrm{.}21$

$1\mathrm{.}27$

$0\mathrm{.}75$

$0\mathrm{.}72$

Assume the answer to question $5$ for beta of A is $0\mathrm{.}75,$ apply the CAPM model to decide whether security A is overpriced or underpriced or in equilibrium.

Over priced

Underpriced

Fairly priced

I cannot tell with the information given

Assume that the expected return on another security, B is $3\mathrm{.}8\%$ and that the beta of B is $1\mathrm{.}58.$ Show whether security B is overpriced, underpriced or in equilibrium.

Overpriced

Underpriced

Fairly priced

I cannot tell with the information given

Refer to questions $6$ and $7$ above. Calculate the beta of portfolio, Q that is constructed with $60\%$ weight in asset A and $40\%$ weight in asset, B$.$

$1\mathrm{.}17$

$2\mathrm{.}33$

$1\mathrm{.}08$

$1\mathrm{.}25$

Assume that the beta of Q is $1\mathrm{.}95,$ calculate the expected return on Q and required rate return on Q according to CAPM.

$4\mathrm{.}94\%$; $4\mathrm{.}94\%$

$4\mathrm{.}94\%$; $4\mathrm{.}75\%$

$7\mathrm{.}41\%$; $4\mathrm{.}94\%$

$2\mathrm{.}34\%$; $2\mathrm{.}34\%$

Is Q underpriced or overpriced or in equilibrium according to CAPM?

Over priced

Underpriced

Fairly priced

It is not priced