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

3. A market consists of two risky assets and no risk-free asset. Let R₁ and R₂ denote the return on each of the risky assets. Using market data the following have been estimated: E[R₁] = 0.10, E[R₂] = 0.15, o² = Var(R₁) = 0.1², o² = Var(R₂) = 0.2² and p1,2 = -1/2 where P1,2 denotes the correlation coefficient for R₁ and R₂. (i) Given that an investor is targeting a total expected return of portfolio, what is the minimum variance that can be achieved? = 0.125 on a (ii) Determine the global minimum variance portfolio and the expected return and variance of return on this portfolio. (iii) Using your answers to parts (i) and (ii) make a rough sketch of the minimum- variance set in - o2 space. You should indicate the efficient frontier and the global minimum variance portfolio. (iv) Without further calculation, explain how you would expect the variance of return calculated in (ii) to change if the two risky assets were independent.

A diagram of the CML and SML for the market M, risk-free asset ry, an inefficient portfolio P, and a complete portfolio C is shown below. The diagram is not to scale. E(r) E(13) CML & CALP E(12) P C E(r) M 01 02 03 P βρ SML M Вм The values of the labeled variables are E[1] = 3.0%, E[12] = 10.3%, E[3] = 16.7%, σ₁ = 17.9%, σ = 30.0%, 03 = 44.3%. What is the standard deviation of nonsystematic risk for the complete portfolio σc under the CAPM? O a. 0.1374 O b. 0.1180 O c. 0.0988 d. 0.1105 O e. 0.0791 O f. 0.0913 Og. 0.0858 O h. 0.1443

Asset W has an expected return of 13.4 percent and a beta of 1.6. If the risk-free rate is 5.0 percent, complete the following table for portfolios of Asset W and a risk-free asset. (Do not round intermediate calculations and enter your expected return answers as a percent rounded to 2 decimal places, e.g., 32.16. Round your beta answers to 3 decimal places, e.g., 32.161.)   Asset W has an expected return of 13.4 percent and a beta of 1.6. If the risk-free rate is 5.0 percent, complete the following table for portfolios of Asset W and a risk-free asset. (Do not round intermediate calculations and enter your expected return answers as a percent rounded to 2 decimal places, e.g., 32.16. Round your beta answers to 3 decimal places, e.g., 32.161.)

A single mispriced asset has an alpha a = 3.0%, a beta ẞ = 1, and unsystematic risk σ² = 9%. The market risk premium is 5.0% and the market's standard deviation is 0.1. What is the information ratio of the mispriced asset? In constructing an optimal allocation between this mispriced asset and the market portfolio, what proportion of your investment would you place in the mispriced asset? Oa. 0.1; 6.67% O b. 0.33; 6.67% O c. 0.33; 6.90% O d. 0.1; 66.67% O e. 0.1; 6.90%

Use the basic equation for the CAPM to rework each of the following problems for above case. Case A) Find the required return for an asset with a beta of 0.9 when the risk-free rate and market return are 8% and 12% respectively. Case B) Find the risk-free rate for a firm with a required return of 15% and a beta of 1.25 when the market return is 14%. Case C) Find the market return for an asset with a required return of 16% and a beta of 1.1 when the risk-free rate is 9%. Case D) Find the beta for an asset with a required return of 15% when the risk-free rate and market return are 10% and 12.5% respectively.

Return on a portfolio of two risky assets which are perfectly negatively correlated is equivalent to a. Risk-free rate b. Return on market portfolio c. Zero return d. -1%

The portfolio with the highest Sharpe Ratio is I. The minimum-variance point on the efficient frontier II. The tangency point of the capital market line and the efficient frontier III. The maximum-return point on the efficient frontier  IV. The line with the steepest slope that connects the risk-free rate to the efficient frontier Select one: a. II and IV only b. I and IV only c. III and IV only d. Only IV e. I and II only

4. Valuation of a Derivative Consider a derivative on a stock with the time to expiration T and the following payoff: 0 K₁ 0 if ST K₁. What is the present value of the derivative? Provide an analytic expression of the price using N(), the cumulative probability distribution function of a standard normal random variable.

The Capital Market Line (CML) expresses the risk-return trade-off for a portfolio as follows: E(Rport )=RFR+Oport [(E(Rm)-RFR)/om ] Required: Extend this expression to allow for the evaluation of any individual risky Asset i. Explain the steps in details.