1. There are two mutual funds, A and B with the following information, R₁ Security The Market The Riskfree Bond 0.08 0.03 Mutual Fund A Mutual Fund B 0₁ 0.20 0.07 I 0.09 (iii) 0.12 0.30 Pim (i) (iv) (vi) (vii) (viii) 1.2 where σ; is the standard deviation, and pim is the correlation with the market portfolio. Assume that the CAPM holds, with fund A being efficient. (a) What are the answers to (i)-(v) above without doing any computation? (b) From given information, compute (vi) and (vii) in the table above. (c) If you are using the CAPM as a benchmark, which fund should you buy? [hint: what is the return implied by the CAPM] B₁ (ii)

1. There are two mutual funds, A and B with the following information, R₁ Security The Market The Riskfree Bond 0.08 0.03 Mutual Fund A Mutual Fund B 0₁ 0.20 0.07 I 0.09 (iii) 0.12 0.30 Pim (i) (iv) (vi) (vii) (viii) 1.2 where σ; is the standard deviation, and pim is the correlation with the market portfolio. Assume that the CAPM holds, with fund A being efficient. (a) What are the answers to (i)-(v) above without doing any computation? (b) From given information, compute (vi) and (vii) in the table above. (c) If you are using the CAPM as a benchmark, which fund should you buy? [hint: what is the return implied by the CAPM] B₁ (ii)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 21P

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