Danthine and Donaldson express the CCAPM for the market portfolio as: ÏM,t+1 − "f,t+1 = −(1+ƒ,t+1)p(m, †M,t+1)σ(mt)σ (FM,t+1) where the LHS is the equity risk premium of the market portfolio. Answer the following: (a) How do Reitz (1988) and Campbell and Cochrane (1999) explain the equity risk premium? (b) How do these empirical papers address the RHS of Equation (1)?

The slope of the Security Market Line equals to ____, and the slope of Capital Allocation Line equals to____. Select one: A. Beta; Sharpe Ratio B. Market Risk Premium; Sharpe Ratio C. Risk free rate; Volatility D. Market Risk Premium; Volatility

When working with the CAPM, which of the following factors can be determined with the most precision?   a. The beta coefficient of "the market," which is the same as the beta of an average stock.     b. The beta coefficient, bi, of a relatively safe stock.     c. The market risk premium (RPM).     d. The most appropriate risk-free rate, rRF.     e. The expected rate of return on the market, rM.

Please do a and b separate (Question 2) a) Plot the Security Market Line (SML)b) Superimpose the CAPM’s required return on the SMLc) Indicate which investments will plot on, above and below the SML? d) If an investment’s expected return (mean return) does not plot on the SML, what doesit show? Identify undervalued/overvalued investments from the graph.

Fill the parts in the above table that are shaded in yellow. You will notice that there are nineline items.  Using the data generated in the previous question (Question 1);a) Plot the Security Market Line (SML) b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and below the SML?d) If an investment’s expected return (mean return) does not plot on the SML, what doesit show? Identify undervalued/overvalued investments from the graph   Please answer A, B, C & D

Assume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found to be halfof the required return (RB) on stock B. The risk-free rate (Rf) is one-fourthof the required return on A. Return on market portfolio is denoted by RM. Find the ratioof betaof A(A) tobeta of B(B). Thank you for your help.

Which of the following statements regarding the graph of the SML is most accurate? A Select one OA. The beta of Portfolios A, B, and C are identical as they fall directly on the line. B. The expected return of Portfolio C is the difference between the market's expected return and the risk-free rate. C. Portfolio A has lower systematic risk than Portfolio B. D. The slope of the line is the market risk premium.

Using the data generated in the previous question (Question 1); a) Plot the Security Market Line (SML)  b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and below the SML? d) If an investment’s expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph

The CAPM states that the expected (required) return on an asset is : E(Ri)=Rf+βi[E(RM)−Rf] where the term in square brackets is the risk-premium earned by the market portfolio.  Therefore, the beta of the market portfolio (βM) must be equal to __________ . A) zero B) 0.5 C) 1.0 D) an unknown estimate

Questions C and D is required.    c) Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B (B).  d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether asset A and B are overvalued or undervalued, and explain why. (Hint: Beta of asset i ( , where are standard deviations of asset i and market portfolio, is the correlation between asset i and the market portfolio)