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Assume that the following market model adequately describes thereturn generating behavior of risky assets:

  

Rit=?i+?iRMt+?itRit=?i?+?iRMt+?it

  

Here:

  

Rit = The return on the ith asset at Timet.

RMt = The return on a portfolio containing all riskyassets in some proportion at Time t.

RMt and ?it?it are statistically independent.

  

Short selling (i.e., negative positions) is allowed in themarket. You are given the following information:

  

Asset	?i	E(Ri )		Var(€i)
A	.65	7.91	%	.0200
B	1.15	11.56		.0145
C	1.51	13.25		.0226

  

The variance of the market is .0122, and there are notransaction costs.

  

a.	Calculate the standard deviation of returns for each asset.(Do not round intermediate calculations and enter youranswers as a percent rounded to 2 decimal places, e.g.,32.16.)

  

Asset	Standard deviation
A	%
B	%
C	%

  

b.	Calculate the variance of return of three portfolios containingan infinite number of asset types A, B, or C, respectively.(Do not round intermediate calculations and round youranswers to 6 decimal places, e.g., 32.161616.)

  

Asset	Variance of return
A
B
C

  

c-1.	Assume the risk-free rate is 3 percent and the expected returnon the market is 9 percent. What is the expected return of eachasset? (Do not round intermediate calculations and enteryour answers as a percent rounded to 2 decimal places, e.g.,32.16.)

  

Asset	Expected returns
A	6.9%
B	9.9 %
C	12.06 %

  

c- 2.	Which asset will not be held by rational investors?
	X Asset C Asset A Asset B