3. a)Suppose that the expected return on the market portfolio ERm=0.07 , return on the...
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3. a)Suppose that the expected return on the market portfolio ERm=0.07 , return on the risk-free rate rf=0.01 and a variance m2=0.025. Use the Capital Asset Pricing Model (CAPM) to calculate the expected return of a risky asset i that has a covariance im=0 with the market return, also interpret the beta of this security. [4]
b). Securities A and B have forecasted returns of 14% and 18% over the next 12 months. During the same period, the market (M) is expected to generate returns of 16%. If the risk-free rate is 6%, and A = B = 1.1, use the CAPM and the SML to determine whether the securities are correctly valued.
3.Suppose that the expected return on the market portfolio ERm=0.07 , return on the risk-free rate rf=0.01 and a variance m2=0.025. Use the Capital Asset Pricing Model (CAPM) to calculate the expected return of a risky asset i that has a covariance im=0 with the market return, also interpret the beta of this security. [4]
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