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Market portfolio consists only of two stocks: stock A and B. Stock A has an expected return of 7% and a volatility of 20%. Stock B has an expected return of 19% and a volatility of 40%. Both stocks are independent each other. The risk-free rate is 3%. Market portfolio weights for stocks A and B are equal. 1. Is the market in equilibrium or not? Is the market portfolio efficient? 2. Now, a good new for stock B arrives in the market, which leads to price increase of stock B. Right after the new, stock B has an expected return of 15% due to the increase of current stock price. If other assumptions are unchanged, is efficient the market portfolio? 3. If there exists a significant portion of feedback traders among investors who tend to trade following recent market price trend, can the market portfolio be an efficient portfolio?

Market portfolio consists only of two stocks: stock A and B. Stock A has an expected return of 7% and a volatility of 20%. Stock B has an expected return of 19% and a volatility of 40%. Both stocks are independent each other. The risk-free rate is 3%. Market portfolio weights for stocks A and B are equal. 1. Is the market in equilibrium or not? Is the market portfolio efficient? 2. Now, a good new for stock B arrives in the market, which leads to price increase of stock B. Right after the new, stock B has an expected return of 15% due to the increase of current stock price. If other assumptions are unchanged, is efficient the market portfolio? 3. If there exists a significant portion of feedback traders among investors who tend to trade following recent market price trend, can the market portfolio be an efficient portfolio?

Essentials Of Investments
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
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Market portfolio consists only of two stocks: stock A and B. Stock A has an expected return of 7% and a volatility of 20%. Stock B has an expected return of 19% and a volatility of 40%. Both stocks are independent each other. The risk-free rate is 3%. Market portfolio weights for stocks A and B are equal. 1. Is the market in equilibrium or not? Is the market portfolio efficient? 2. Now, a good new for stock B arrives in the market, which leads to price increase of stock B. Right after the new, stock B has an expected return of 15% due to the increase of current stock price. If other assumptions are unchanged, is efficient the market portfolio? 3. If there exists a significant portion of feedback traders among investors who tend to trade following recent market price trend, can the market portfolio be an efficient portfolio?
Transcribed Image Text:Market portfolio consists only of two stocks: stock A and B. Stock A has an expected return of 7% and a volatility of 20%. Stock B has an expected return of 19% and a volatility of 40%. Both stocks are independent each other. The risk-free rate is 3%. Market portfolio weights for stocks A and B are equal. 1. Is the market in equilibrium or not? Is the market portfolio efficient? 2. Now, a good new for stock B arrives in the market, which leads to price increase of stock B. Right after the new, stock B has an expected return of 15% due to the increase of current stock price. If other assumptions are unchanged, is efficient the market portfolio? 3. If there exists a significant portion of feedback traders among investors who tend to trade following recent market price trend, can the market portfolio be an efficient portfolio?
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