Question

In: Finance

If the simple CAPM is valid, which of the following situations are possible? You must provide...

If the simple CAPM is valid, which of the following situations are possible? You must provide an explanation.
Consider each case independently. Your answer should begin with: This is possible or This is not possible because…

For each case, M is the market portfolio and F is the risk-free asset

a Portfolio Expected return (%) Standard deviation(%)
A 10 15
B 5

20

b. Portfolio Expected return(%) Beta
A 10 1.1
B 9

1.2

c Portfolio Expected return(%) Standard deviation(%)
A 12 20
M 12 16
F 4

Solutions

Expert Solution

a This is possible, since CAPM is valid. The CAPM return covers only the systematic risk which is presented by the market in the form of Beta which does not include non systematic risk like standard deviation. Hence, Portfolio B's lower rate of return can have higher standard deviation and portfolio A's higher rate of return can have lower standard deviation. However, this would be valid if the beta of B is lower than beta of A
b This is not possible because the CAPM covers the systematic risk. Therefore a portfolio with higher return will have higher beta that is systematic risk and a portfolio with lower return will have lower Beta.
Here, portfolio A has higher expected rate of return but lower Beta and Portfolio B has lower rate of return and higher Beta
c This is possible, As per CAPM the expected return from market should be more than the expected return from portfolio of they have Beta more than 1. Since CAPM does not cover standard deviation and Beta is not known, they can have same return and higher standard deviation for Portfolio A than for market due to various other risk involved

Related Solutions

If the simple CAPM is valid and all portfolios are priced correctly, which of the situations...
If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below is possible? Consider each situation independently, and assume the risk-free rate is 5%. A) Portfolio Expected Return Beta A 12 % 1.2 Market 12 % 1.0 B) Portfolio Expected Return Standard Deviation A 15 % 12 % Market 10 % 20 % C) Portfolio Expected Return Beta A 15 % 1.2 Market 10 % 1.0 D) Portfolio Expected Return Beta A 19.0 %...
If the simple CAPM is valid and all portfolios are priced correctly, which of the situations...
If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below are possible? Consider each situation independently and assume the risk free rate is 5%:      Option (A) Portfolio Expected Return Beta Portfolio A 18.0% 1.2 Market Portfolio 18.0% 1.2 Option (B) Portfolio Expected Return Beta Portfolio A 17.5% 2.5 Market Portfolio 10.0% 1.0 Option (C) Portfolio Expected Return Beta Portfolio A 27.0% 1.0 Market Portfolio 15.0% 1.0 Option (D) Portfolio Expected Return Standard Deviation...
If the simple CAPM is valid, is the situation detailed below possible? Explain in a few...
If the simple CAPM is valid, is the situation detailed below possible? Explain in a few short sentences Portfolio Expected Return Std Dev Risk-free 10% 0% Market 21% 28% A 18% 20%
Which of the following statements is true? a. It is possible that the APT is valid...
Which of the following statements is true? a. It is possible that the APT is valid and the CAPM is not. True False b. It is possible that the CAPM is valid and the APT is not. True False
In a simple CAPM world which of the following statements is (are) correct? I. All investors...
In a simple CAPM world which of the following statements is (are) correct? I. All investors will choose to hold the portfolio which includes all riskless assets in the world. II. Investors will choose the same portfolio even if their levels of risk aversion are different. III. The return per unit of risk will be different for different individual assets. IV. The market portfolio will be on the efficient frontier, and it will be the optimal risky portfolio. Multiple Choice...
Indicate which of the following are valid C++ variable names and which are not. If not,...
Indicate which of the following are valid C++ variable names and which are not. If not, state the reason the name is invalid. Variable Name Valid – Yes/No If Invalid – Reason income 2time int Tom's two fold c3po income#1 item
26) In which of the following situations would you prefer to be the lender?
SCENARIO 4. Notation: C = currency; D = demand deposits; T = time deposits; & S = saving deposits. Suppose M1 = C + D; M2 = C + D + T; M3 = C + D + T + S. Suppose also that C = .05D; T = .4D; & S = .3D. The Fed imposes the following reserve requirements: rd = .2; rt = .3; rs = .15. Banks keep the following excess reserve ratios: ed = .05;...
Which of the following is an assumption of CAPM? The price of the asset is driven...
Which of the following is an assumption of CAPM? The price of the asset is driven by investors’ trading actions. All the investors have the same expectations of the market. Investors’ wealth in the next period depends on the performance of their portfolios during the current period. Investors pay small amount of transaction costs.
1a. Provide an example of a research question in which you must test if the mean...
1a. Provide an example of a research question in which you must test if the mean value of a variable is equal to its historical value and describe the null hypothesis.. 1b. Which field of business uses these methods the most?
For a reaction to be endothermic, which of the following relationships is valid? For a reaction...
For a reaction to be endothermic, which of the following relationships is valid? For a reaction to be endothermic, which of the following relationships is valid?   The energy required to break bonds is greater than the energy involved in bond formation.   The energy required to break bonds is less than the energy involved in bond formation.   The energy required to break bonds is the same as the energy involved in bond formation.   The number of bonds...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT