Please answer question 2-b 2.(a) Discuss the main assumptions of the Capital Asset Pricing Model (CAPM).(b) Write the equation of the Security Market Line (SML). Compute and drawtheSML when the expected return of the NASDAQ index (market portfolio) is17% and the return to the risk-free asset is 7%.(c) Given the SML in (b), compute the beta and the expected return of thenewshare Facebook assuming the volatility of the NASDAQ index (marketportfolio) is 23.86% and its covariance with the share is 0.0655.(d) Facebook pays a dividend of 5 GBP and the growth of dividends is equal to4%for the first two years and then rise to 6%. Assuming constant cost of capitalas computed in point (c), estimate the price of the Facebook share.(e) Consider investing 20% of your wealth in the Facebook share with beta asin(c). What is the proportion you need to allocate to the Apple share with beta1.8 in order to replicate the market portfolio?

. The equation of the Security Market Line (SML) is given by: Expected Return = Risk-Free Rate +…

Answered: ) Write the equation of the Security…

) Write the equation of the Security Market Line (SML). Compute and draw theSML when the expected return of the NASDAQ index (market portfolio) is 17% and the return to the risk-free asset is 7%.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter6: Risk And Return

Section: Chapter Questions

Problem 1Q

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Question

Please answer question 2-b

2.
(a) Discuss the main assumptions of the Capital Asset Pricing Model (CAPM).
(b) Write the equation of the Security Market Line (SML). Compute and draw
theSML when the expected return of the NASDAQ index (market portfolio) is
17% and the return to the risk-free asset is 7%.
(c) Given the SML in (b), compute the beta and the expected return of the
newshare Facebook assuming the volatility of the NASDAQ index (market
portfolio) is 23.86% and its covariance with the share is 0.0655.
(d) Facebook pays a dividend of 5 GBP and the growth of dividends is equal to
4%for the first two years and then rise to 6%. Assuming constant cost of capital
as computed in point (c), estimate the price of the Facebook share.
(e) Consider investing 20% of your wealth in the Facebook share with beta as
in(c). What is the proportion you need to allocate to the Apple share with beta
1.8 in order to replicate the market portfolio?

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