Q3 Consider a market that consists of only two assets, A and B. Asset 02 Pi,...

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Q3 Consider a market that consists of only two assets, A and B. Asset 02 Pi, A Pi, B A 0.4 0.2 0.04 1 0.3 B 0.6 0.5 0.25 0.3 1 p denotes the correlation coefficient and w denotes the asset's weight in the market portfolio. r = 3%; E(rm) = 13%. a. What is the variance of the market portfolio? b. What are the covariances with the market portfolio of the two assets? c. What are the CAPM s of the two assets and the market portfolio? d. What are the reward-to-risk (use variance as risk) ratios of the two assets and the market portfolio? - e. What are the contributions of each asset to the market excess return, E(rm) r? f. What are the contributions of each asset to the market variance, ^ ^? g. What are the contributions of each asset to the reward-to-risk ratio of the market? h. Suppose you had found that the contribution of asset A to reward-to-risk ratio of the market was 1 and that the contribution of asset of B to the same ratio was 0.8. How could you construct a portfolio that beats the market? Could this be an equilibrium? Q3 Consider a market that consists of only two assets, A and B. Asset 02 Pi, A Pi, B A 0.4 0.2 0.04 1 0.3 B 0.6 0.5 0.25 0.3 1 p denotes the correlation coefficient and w denotes the asset's weight in the market portfolio. r = 3%; E(rm) = 13%. a. What is the variance of the market portfolio? b. What are the covariances with the market portfolio of the two assets? c. What are the CAPM s of the two assets and the market portfolio? d. What are the reward-to-risk (use variance as risk) ratios of the two assets and the market portfolio? - e. What are the contributions of each asset to the market excess return, E(rm) r? f. What are the contributions of each asset to the market variance, ^ ^? g. What are the contributions of each asset to the reward-to-risk ratio of the market? h. Suppose you had found that the contribution of asset A to reward-to-risk ratio of the market was 1 and that the contribution of asset of B to the same ratio was 0.8. How could you construct a portfolio that beats the market? Could this be an equilibrium?