The market portfolio has a mean return of 8% and a return standard deviation of...
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The market portfolio has a mean return of 8% and a return standard deviation of 24%. The risk-free rate is 0.5%. i. What is the efficient way to construct a portfolio with a mean return of 9.5% and what is the standard deviation of that portfolios return? ii. What is the efficient way to construct a portfolio with a standard deviation of 32%? Interpret the portfolio weights you have derived and also compute and interpret the expected return on the portfolio. iii. Compute and interpret the betas of the two portfolios that you have constructed in (i) and (ii)? iv. What are the Sharpe ratios of the portfolios constructed in (i) and (ii)? In a CAPM world, can one construct a position with a larger Sharpe ratio than either of them? Explain your answer. (50 marks) b. Explain how the APT differs from the CAPM in terms of the assumptions it requires, the manner in which it is derived and the results that it delivers. Empirically, which of the two modules do you think gives a better fit to the data that we see in developed stock markets?
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