Question 2: 10 marks Consider the information given in the Table 2A and complete Table 2B. From the completed Table 2B, use the information to grpahically present the Security Market Line (SML). Compute the slope of this line. Hints: i) When 100% money is invested in asset X (portfolio weight 1), the beta of the portfolio is 0.85 = ii) Since the risk-free asset is, well, risk-free, its beta will be zero Table 2A Expected return for asset x (%) 13 Risk free rate (%) 5 Beta of asset X 0.85 Table 2B Expected portfolio return Portfolio beta Proportion of portfolio in Asset X 0.00 0.25 0.50 0.75 1.00 1.25 2

Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter25: Portfolio Theory And Asset Pricing Models
Section: Chapter Questions
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Question 2: 10 marks
Consider the information given in the Table 2A and complete Table 2B.
From the completed Table 2B, use the information to grpahically
present the Security Market Line (SML). Compute the slope of this
line.
Hints:
i)
When 100% money is invested in asset X (portfolio weight
1), the beta of the portfolio is 0.85
=
ii)
Since the risk-free asset is, well, risk-free, its beta will
be zero
Table 2A
Expected return for asset x (%) 13
Risk free rate (%)
5
Beta of asset X 0.85
Table 2B
Expected
portfolio
return
Portfolio
beta
Proportion of portfolio
in Asset X
0.00
0.25
0.50
0.75
1.00
1.25
2
Transcribed Image Text:Question 2: 10 marks Consider the information given in the Table 2A and complete Table 2B. From the completed Table 2B, use the information to grpahically present the Security Market Line (SML). Compute the slope of this line. Hints: i) When 100% money is invested in asset X (portfolio weight 1), the beta of the portfolio is 0.85 = ii) Since the risk-free asset is, well, risk-free, its beta will be zero Table 2A Expected return for asset x (%) 13 Risk free rate (%) 5 Beta of asset X 0.85 Table 2B Expected portfolio return Portfolio beta Proportion of portfolio in Asset X 0.00 0.25 0.50 0.75 1.00 1.25 2
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