Question

a. What is the risk level of a portfolio on the efficient frontier with a return of 6% when the market portfolio has an expected return of 10% and the risk free rate is 2%? The standard deviation of the returns on market is 14%.

b. What is the expected rate of return and alpha of a stock with a ? of 0.9, when the realised gain on the stock is 13% next year?

Answer 1

a) Concept: Capital Asset Pricing Model (CAPM)
given : portfolio return= 6%
expected market return= 10%
risk free rate of return= 2%
standard deviation = 14%
formula used: portfolio return= risk free rate of return + beta(expected return-risk free return)
to find: Beta
Beta is the measure of volatility or the systemic risk of the portfolio
CALCULATIONS:
Putting the given values in the above formula we get
0.06= 0.02+beta(0.10-0.14)
beta= -1
beta =-1 denotes that security will be less volatile then the market and many utility stocks have beta less than 1.

b) question does not give accurate information that what this value 0.9 is.
concept : capital asset pricing model (CAPM)
formula used:
alpha= realized gain-[risk free return+(expected market returns- risk free return)beta]
alpha is the measure of performance which compares the realized returns with the returns which should be earned with the amount of risk taken by the investor.