Suppose CAPM assumptions hold. Suppose you are given the following regarding two assets A and B...

 

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Suppose CAPM assumptions hold. Suppose you are given the following regarding two assets A and B traded in a market M: Er=10.5% Erg=13% and and BA=0.7 BB=1.2 Answer the following questions: 1. [2] Compute the expected rate of rate of return on the market M and the risk-free rate. 2. [1] Suppose you decided to invest 30% of your wealth in A, 30% in B, and 40% in the risk-free asset. What is the expected rate of return and the beta of the constructed portfolio? 3. [2] Suppose you decided to revise the previous portfolio as follows: sell some of your holdings of the risk-free asset and use the proceeds to buy the market portfolio in order to achieve a target rate of return of 12.55%. Characterize this new portfolio, i.e., find the weights of the assets in this new portfolio and its beta coefficient. Suppose CAPM assumptions hold. Suppose you are given the following regarding two assets A and B traded in a market M: Er=10.5% Erg=13% and and BA=0.7 BB=1.2 Answer the following questions: 1. [2] Compute the expected rate of rate of return on the market M and the risk-free rate. 2. [1] Suppose you decided to invest 30% of your wealth in A, 30% in B, and 40% in the risk-free asset. What is the expected rate of return and the beta of the constructed portfolio? 3. [2] Suppose you decided to revise the previous portfolio as follows: sell some of your holdings of the risk-free asset and use the proceeds to buy the market portfolio in order to achieve a target rate of return of 12.55%. Characterize this new portfolio, i.e., find the weights of the assets in this new portfolio and its beta coefficient.