Question

1. Assume the risk-free rate is 2% (rf = 2%), the expected return on the market portfolio is 6% (rM = 6%) and the standard deviation of the return on the market portfolio is 15% (ƠM = 15%).(All numbers are annual.) Assume the CAPM holds. a. What are the expected returns on securities with the following betas: (i) ß = 1.4 (ii) ß = 0.6(iii) B = -0.2 b. What are the betas of securities with the following expect returns: (i) 10% (ii) 5% (iii) -1% c. What are the portfolio weights (in the risk-free asset and the market portfolio) for efficient portfolios (portfolios on the efficient frontier/CML) with expected returns of (i) 4% (ii) 5% (iii) 7% d. What are the portfolio weights (in the risk-free asset and the market portfolio) for efficient-portfolios (portfolios on the efficient frontier/CML) with standard deviations of (i) 6% (ii) 15% (iii)21% e. For a moment (but just a moment) assume that the CAPM may not hold. A non-dividend paying stock has a current price of $50/share and an expected price in 1 year of $53/share (based on your personal analysis of the company's prospects). (i) If the stock has a beta of 1 (ß = 1.0), what is its alpha (x)? (ii) What is the alpha (α) if the beta is 2 (ß = 2.0)?

Fig: 1

Fig: 2

Fig: 3

Fig: 4

Fig: 5

Fig: 6