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
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
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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