In Simpleland, there are only two risky assets in the market, A and B. Theinformation and CAPM estimates of A and B are shown in the following table:A100 Million0.09Market Capitalisation ($)|Variance (o²)Covariance between A and BExpected Return on MarketRisk free rate400 Million0.010.220%10%The manager believes that in the near future, B will outperform A by 5% with uncertaintymeasured in variance 0.0005. He has also assigned the error of estimating the aboveCAPM 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?2.

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Answered: 2. information In Simpleland, there are…

2. information In Simpleland, there are only two risky assets in the market, A and B. The and CAPM estimates of A and B are shown in the following table:

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.

Question

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
100 Million
0.09
Market Capitalisation ($)
|Variance (o²)
Covariance between A and B
Expected Return on Market
Risk free rate
400 Million
0.01
0.2
20%
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?
2.

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