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Investment question Let Var(rM)=0.05 be the variance of the return on the market. Assume CAPM...

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Finance

Investment question

Let Var(rM)=0.05 be the variance of the return on the market. Assume CAPM holds and that the following assets are correctly priced according to the security market line. Asset 1: E[r1] = 6%, 1 = 0.5

Asset 2: E[r2] = 12%, 2 = 1.5

(a) What is the return on the risk free asset?

(b) What is the expected return on the market?

(c) Derive the security market line.

(d) What is the expected return on an asset with a beta of 2?

(e) What is the variance of the non-systematic (idiosyncratic) risk of an asset with E[r1] = 6%, 1 = 0.5, and Var(r1) = 0.04?

(f) What is the minimum possible variance of an asset with E[r]=15%?

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