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6.You have assets A and B. Asset A has an expected return of 10%. The market...

6.You have assets A and B. Asset A has an expected return of 10%. The market portfolio return is 12%. The risk free rate is 2%. What is the expected return of asset B if the covariance between A and the market portfolio return is 0.032 and the covariance between B and the market portfolio return is 0.048?

with detailed explanation please

find expected return on asset B

Solutions

Expert Solution

Firstly, with the given information calculate beta for asset A:

using the formula for Capital Asset pricing model (CAPM) :

beta = (expected return for A - risk free rate)/(expected return for market portfolio- risk free rate)

2) Then calculate variance for market portfolio using the formula:

variance = covariance for asset A & market portfolio/ beta for asset A

3) using the variance for market portfolio, calculate beta for Asset B

Beta = Covariance for Asset B & market portfolio/ variance of market portfolio

4)

using this beta and the formula for CAPM , calculate the expected return for asset B

expected return for B = risk free rate + (beta for B * (expected return for market portfolio - risk free rate))

jeff jeffy answered 1 year ago
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