Problem 6. (20 points total) Assume that the risk-free rate is 3% and the expected rate...

 

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Problem 6. (20 points total) Assume that the risk-free rate is 3% and the expected rate of return on the market portfolio is 10%. (a) (5 points total) Graphically show what the SML. (Security Market Line) looks like (1 point). Indicate where the risk-free asset and the market portfolio lie along the SML. (1 point each). You can create this graph by hand or by computer. What is the slope of the SML? (1 point) What is the y-intercept of the SML? (1 point) (b) (9 points total) There are a total of three risky stocks which have the following characteris- tics: Asset E (R.) B 2.1% -0.1 1.6 A 14.2% B C 6.0% 0.4 Calculate the CAPM a for each of the three stocks (2 points each). Show graphically where these three assets lie in relation to the SML (1 point each). [Hint: It should not be the case that all three of them lie exactly on the SML..] (c) (6 points total) Based on your answer in Part (b), tell me the whether each of the three assets are overpriced, underpriced, or properly priced (2 points each for Asset A, B, and C). Problem 6. (20 points total) Assume that the risk-free rate is 3% and the expected rate of return on the market portfolio is 10%. (a) (5 points total) Graphically show what the SML. (Security Market Line) looks like (1 point). Indicate where the risk-free asset and the market portfolio lie along the SML. (1 point each). You can create this graph by hand or by computer. What is the slope of the SML? (1 point) What is the y-intercept of the SML? (1 point) (b) (9 points total) There are a total of three risky stocks which have the following characteris- tics: Asset E (R.) B 2.1% -0.1 1.6 A 14.2% B C 6.0% 0.4 Calculate the CAPM a for each of the three stocks (2 points each). Show graphically where these three assets lie in relation to the SML (1 point each). [Hint: It should not be the case that all three of them lie exactly on the SML..] (c) (6 points total) Based on your answer in Part (b), tell me the whether each of the three assets are overpriced, underpriced, or properly priced (2 points each for Asset A, B, and C).

Answer rating: 100% (QA)

a Graphically the Security Market Line SML represents the relationship between the expected rate of ... View the full answer