Consider a CAPM economy. The risk free rate (rf ) is 4% and the expected market return (rM ) is 10%.  (a) Stock 1: β = 0.90. Compute the expected return of stock 1.  (b) Stock 2: β = 1.1. Compute the expected return of stock 2.  (c) Portfolio 1: The proportions invested in stock 1, stock 2, and risk free asset are 30%, 30%, and 40%, respectively. Compute the beta and expected return of portfolio 1.  (d) Portfolio 2: The proportions invested in stock 1, stock 2, and risk free asset are 50%, 60%, and -10%, respectively. Compute the beta and expected return of portfolio 2.

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
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Consider a CAPM economy. The risk free rate (rf ) is 4% and the expected market return (rM )
is 10%. 


(a) Stock 1: β = 0.90. Compute the expected return of stock 1. 


(b) Stock 2: β = 1.1. Compute the expected return of stock 2. 


(c) Portfolio 1: The proportions invested in stock 1, stock 2, and risk free asset are 30%, 30%,
and 40%, respectively. Compute the beta and expected return of portfolio 1. 


(d) Portfolio 2: The proportions invested in stock 1, stock 2, and risk free asset are 50%, 60%,
and -10%, respectively. Compute the beta and expected return of portfolio 2. 

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