( The Zero - beta CAPM. ) Consider a two - period economy with per - fect...
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Question:
The Zerobeta CAPM. Consider a twoperiod economy with per
fect financial markets, where three risky assets in positive net supply
are traded at date and assets generate cash flows at date There
are investors in the date financial markets. The investors only
want to consume at date and investor is endowed with a mean
variance utility function var where is increasing
in its first argument and decreasing in its second argument, and tilde is
investor s daterandom terminal wealth. The date equilibrium
rates of return on the three traded assets have the following first and
second moments notation follows from Lecture :
i Recall the following parameters:
Then we have and
No
ii Recall the minimum variance portfolio Let denote the
expected rate of return on Then there is a positive integer
such that where
iii Suppose that there are only three investors in this economy
and for all investor s date initial wealth is
where is a constant. Let denote the expected rate of return
on investor s equilibrium portfolio. You are told that
and Then the expected rate of return on themarket portfolio is No Moreover, one can show that the
market portfolio is
where and No
iv Suppose that portfolio has
Then the expected rate of return on portfolio denoted is equal
to where No
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