In: Finance
According to the Capital Asset Pricing theory, what return
would be required by an investor whose...
- According to the Capital Asset Pricing theory, what return
would be required by an investor whose portfolio is made up of 40%
of the market portfolio (m) and 60% of Treasury bills (i.e.
risk-free asset)? Assume the risk-free rate is 3% and the market
risk premium is 7%?
- You are considering investing in the following two stocks. The
risk-free rate is 7 percent and the market risk premium is 8
percent.
Stock
|
Price Today
|
Expected Price
in 1 year
|
Expected Dividend
in 1 year
|
Beta
|
X
|
$20
|
$22
|
$2.00
|
1.0
|
Y
|
$30
|
$32
|
$1.78
|
0.9
|
- Compute the expected and required return (using CAPM) on each
stock.
- Which asset is worth investing? Support your answer with
calculations.
- Which pair of stocks used to form a 2-asset portfolio would
have the greatest diversification effect for the portfolio? Briefly
explain.
|
Correlation
|
Stocks A & B
|
-0.66
|
Stocks A & C
|
-0.42
|
Stocks A & D
|
0
|
Stocks A & E
|
0.75
|
(d) Explain the terms systematic risk and
unsystematic risk and their importance in determining
investment return.