Security market line (SML) Assume that the risk-free rate, RF, is currently 8% and that the market return, rm, iscurrently 15%.a. Calculate the market risk premium.b. Given the previous data, calculate the required return on asset A having a beta of 0.8 and asset B having a betaof 1.9.a. The market risk premium is ☐ %. (Round to one decimal place.)b. If the beta of asset A is 0.8, the required return for asset A is %. (Round to one decimal place.)If the beta of asset B is 1.9, the required return for asset B is%. (Round to one decimal place.)

We are given the risk-free rate (RF=8%) and the market return (RM=15%). Using these values, we apply…

Answered: Security market line (SML) Assume that…

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

Problem 1PS

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Capm
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Assume that security returns are generated by the single-index model,Ri = αi + βiRM + eiwhere Ri is the excess return for security i and RM is the market’s excess return. The risk-free rate is 2%. Suppose also that there are three securities A, B, and C, characterized by the following data: Security βi E(Ri) σ(ei) A 0.7 7 % 20 % B 0.9 9 6 C 1.1 11 15 a. If σM = 16%, calculate the variance of returns of securities A, B, and C. b. Now assume that there are an infinite number of assets with return characteristics identical to those of A, B, and C, respectively. What will be the mean and variance of excess returns for securities A, B, and C? (Enter the variance answers as a percent squared and mean as a percentage. Do not round intermediate calculations. Round your answers to the nearest whole number.)
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