2. [21 marks] In Simpleland, there are only two risky assets in the market, A...
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2. [21 marks] In Simpleland, there are only two risky assets in the market, A and B. The information and CAPM estimates of A and B are shown in the following table: A B Market Capitalisation ($) 100 Million 400 Million Variance (62) 0.09 0.01 Covariance between A and B 0.2 Expected Return on Market 20% Risk free rate 10% The manager believes that in the near future, B will outperform A by 5% with uncertainty measured in variance 0.0005. He has also assigned the error of estimating the above CAPM model in terms of variance to be 0.01, i.e. t = 0.01. a) What is the expected return of A and B under CAPM? [5] 2. [21 marks] In Simpleland, there are only two risky assets in the market, A and B. The information and CAPM estimates of A and B are shown in the following table: A B Market Capitalisation ($) 100 Million 400 Million Variance (62) 0.09 0.01 Covariance between A and B 0.2 Expected Return on Market 20% Risk free rate 10% The manager believes that in the near future, B will outperform A by 5% with uncertainty measured in variance 0.0005. He has also assigned the error of estimating the above CAPM model in terms of variance to be 0.01, i.e. t = 0.01. a) What is the expected return of A and B under CAPM? [5]
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