8. In a single-factor market, the SML relationship of both the CAPM and the APT states that the risk premium on any security is proportional to beta, or, equivalently, that the security's expected return must be a linear function of beta. Suppose this is not the case, specifically, that expected return rises more than proportionately with beta as in Figure 7.5. (LO 7-1) En FIGURE a. Could this figure be an accurate depiction of the mean-beta relationship in market equilibrium? Hint: Consider the return on a combination of portfolios A and B constructed to match the beta of portfolio C. b. Some researchers have examined the relationship between average returns on diversi- fied portfolios and the ß and ß² of those portfolios. What should they have discovered about the effect of B² on portfolio return? 7.5

8. In a single-factor market, the SML relationship of both the CAPM and the APT states that the risk premium on any security is proportional to beta, or, equivalently, that the security's expected return must be a linear function of beta. Suppose this is not the case, specifically, that expected return rises more than proportionately with beta as in Figure 7.5. (LO 7-1) En FIGURE a. Could this figure be an accurate depiction of the mean-beta relationship in market equilibrium? Hint: Consider the return on a combination of portfolios A and B constructed to match the beta of portfolio C. b. Some researchers have examined the relationship between average returns on diversi- fied portfolios and the ß and ß² of those portfolios. What should they have discovered about the effect of B² on portfolio return? 7.5

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 3Q: Security A has an expected return of 7%, a standard deviation of returns of 35%, a correlation...

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