Consider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. State of the Economy Recession Below Average Probability 0.2 0.1 % Return on T-Bills, Stocks and Market Index T- Bills 7 7 Phillips -22 -2 Pay- Rubber- made 10 up 28 14.7 -10 Market Index -13 1
Question 3
a) Identify two investment alternatives that can be combined in a portfolio. Assume a 50-
50 investment allocation in each investment alternative
b) Compute the expected return of the portfolio thus formed
c) Compute the portfolio’s beta. Is the portfolio aggressive or defensive?
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can you explain why t-bill 7 % was used for calculating the CAPM return? I think it has something to do with % return on t-bill not sure
by Bartleby ExpertCan you provide the information used to plot the security market line in excel?
by Bartleby ExpertPlot the Security Market Line (SML)
b) Superimpose the
c) Indicate which investments will plot on, above and below the SML?
d) If an investment’s expected return (mean return) does not plot on the SML, what does
it show? Identify undervalued/overvalued investments from the graph (
by Bartleby Expert
