Assume the risk-free rate is 1% (rf = 1%), the expected return on t...

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Assume the risk-free rate is 1% (rf = 1%), the expected return on the market portfolio is 5% (E[rm] = 5%) and the standard deviation of the return on the market portfolio is 15% (OM = 15%). (All numbers are annual.) Assume the CAPM holds. a. 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% w(rf) w(rM) b. 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% w(rf) w(rM) c. For a moment (but just a moment) assume that the CAPM may not hold. Anon- 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 (B = 1.0), what is its alpha (a)? (ii) What is the alpha (a) if the beta is 2 (B = 2.0)?

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