1) Suppose volatility of the stock market is 20%. Suppose I always short stocks. What would...

1) Suppose volatility of the stock market is 20%. Suppose I always short stocks.

What would be the volatility of the return of my strategy?

(Please answer in percent. For instance, if your answer is -5%, answer -5 below)

2) Suppose a fund achieves an average return of 10%. Assume that risk-free rate is 0% and market risk premium is 10%, and this fund has a beta of 1.5.

What is the alpha of this fund?

(Answer in percent. For instance, if alpha is -10%, answer -10)

3) Assume the CAPM is true. Suppose risk free rate is 1%. Expected return of the market is 11% (so market risk premium is 10%). Stock A has a beta of -1. What is stock A's expected return?

(Answer in percent. For instance, if the answer is -50%, write -50 in the answer. )

Solutions

Expert Solution

1.
20%

2.
=expected returns-required returns
=expected returns-risk free rate-beta*market risk premium
=10%-0%-1.5*10%
=-5.00000%

3.
=risk free rate+beta*(market return-risk free rate)
=risk free rate+nbeta*market risk premium
=1%-1*10%
=-9.00000%

jeff jeffy answered 2 years ago

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