Let E(n) denote the expected return on asset i and B. denote the corresponding beta. In addition, let E(rm) denote the expected

Let E(n) denote the expected return on asset i and B. denote the corresponding beta. In addition, let E(rm) denote the expected return on the market portfolio and Bm denote the corresponding beta. Define and sketch the Security Market Line (SML). Hint: Use E(rm) - r = 8%, r = 3%, B. = 1.25 and B2 = 0.6.

Solutions

Expert Solution

Security market line is the line which gives the relationship between the expected return of a stock and its Beta .

It is given as

E(ri) = rf + Beta(i) * (E(rm) - rf)

= 3%+ Beta(i)* 8%

The graph of Security Market line is shown below:

The market portfolio has a Beta of 1.

and Risk free asset has a beta of 0.

It is assumed that the expected return of a stock only depends on the sensitivity of stock's return to Market return (beta)

So, this model is basically a one factor model (also called as Capital Assets Pricing model)

Security market line is the line which gives the relationship between the expected return of a stock and its Beta .

Junaid answered 1 year ago

Next > < Previous

Related Solutions

An asset has a beta of 2.0 and an expected return of 20%. The expected risk...

An asset has a beta of 2.0 and an expected return of 20%. The expected risk premium on the market portfolio is 5% and the risk-free rate is 7%. What is the equilibrium return? Select one: a. 0.14 b. 0.17 c. 0.13 d. 0.20

Let µE be the expected return of an efficient portfolio E. Under CAPM let: The expected...

Let µE be the expected return of an efficient portfolio E. Under CAPM let: The expected return of the market portfolio = 10% The rate of return of the risk free asset = 2% The beta value of E = 1.2 Q1 What is the expected return of the efficient portfolio E to one decimal place? Q2 If the standard deviation of the market portfolio is 8%, then what is the standard deviation of efficient portfolio E to one decimal...

Let τ (n) denote the number of positive divisors of n and σ(n) denote the sum...

Let τ (n) denote the number of positive divisors of n and σ(n) denote the sum of the positive divisors of n (as in the notes). (a) Evaluate τ (1500) and σ(8!). (b) Verify that τ (n) = τ (n + 1) = τ (n + 2) = τ (n + 3) holds for n = 3655 and 4503. (c) When n = 14, n = 206 and n = 957, show that σ(n) = σ(n + 1).

Let An = {ai} n i=1 denote a list of n distinct positive integers. The median...

Let An = {ai} n i=1 denote a list of n distinct positive integers. The median mA of An is a value in An such that half the elements in An are less than m (and so, the other half are greater than or equal m). In fact, the median element is said to have a middle rank. (a) Develop an algorithm that uses Sorting to return mA given An. (6%) (b) Now assume that one is given another list...

Asset W has an expected return of 12.8 percent and a beta of 1.25. If the...

Asset W has an expected return of 12.8 percent and a beta of 1.25. If the risk-free rate is 4.7 percent, complete the following table for portfolios of Asset W and a risk-free asset. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Enter your expected returns as a percent rounded to 2 decimal places, e.g., 32.16, and your beta answers to 3 decimal places, e.g., 32.161.) Percentage of Portfolio in Asset...

Asset A has expected return of 16% and variance of 12.98%. Asset B has an expected...

Asset A has expected return of 16% and variance of 12.98%. Asset B has an expected return of 8%, and a variance of 5.29%. The correlation coefficient between the two assets is 0.6. Portfolio X is composed 50% of portfolio A and 50% of portfolio B. Variance of portfolio X is? Answer percent.

Let v1 be an eigenvector of an n×n matrix A corresponding to λ1, and let v2,...

Let v1 be an eigenvector of an n×n matrix A corresponding to λ1, and let v2, v3 be two linearly independent eigenvectors of A corresponding to λ2, where λ1 is not equal to λ2. Show that v1, v2, v3 are linearly independent.

Asset A has an expected return of 15% and standard deviation of 20%. Asset B has an expected return of 20% and standard deviation of 15%.

1. Asset A has an expected return of 15% and standard deviation of 20%. Asset B has an expected return of 20% and standard deviation of 15%. The riskfree rate is 5%. A risk-averse investor would prefer a portfolio using the risk-free asset and _______. A) asset A B) asset B C) no risky asset D) cannot tell from data provided2. The Sharpe-ratio is useful for A) borrowing capital for investing B) investing available capital C) correctly...

Stock a has a beta of 0.69 and an expected return of 9.27 %. Stock B...

Stock a has a beta of 0.69 and an expected return of 9.27 %. Stock B has a 1.13 beta and an expected return of 11.88 %.Stock C has a 1.48 beta and an expected return of 14.26%. Stock D has a beta of .81 and an expected return of 8.71%. Stock E has a 1.45 beta and an expected return of 15.04%. Which of these stocks is correctly priced if the risk free rate of return is 15.36 %...

Let Z* denote the ring of integers with new addition and multiplication operations defined by a...

Let Z* denote the ring of integers with new addition and multiplication operations defined by a (+) b = a + b - 1 and a (*) b = a + b - ab. Prove Z (the integers) are isomorphic to Z*. Can someone please explain this to me? I get that f(1) = 0, f(2) = -1 but then f(-1) = -f(1) = 0 and f(2) = -f(2) = 1 but this does not make sense in order to...

Subjects