Suppose that the market risk premium is 5% and the risk-free rate is 4%. Risky assets A and B are perfectly negatively correlated. Asset A has a standard deviation of returns of 40%, while asset B has a standard deviation of returns of 60%. According to the CAPM, what should be the expected return of a zero variance portfolio constructed of assets A and B? O 5% O 3% O Cannot be determined O 4% O 2%
Suppose that the market risk premium is 5% and the risk-free rate is 4%. Risky assets A and B are perfectly negatively correlated. Asset A has a standard deviation of returns of 40%, while asset B has a standard deviation of returns of 60%. According to the CAPM, what should be the expected return of a zero variance portfolio constructed of assets A and B? O 5% O 3% O Cannot be determined O 4% O 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
Section: Chapter Questions
Problem 1PS
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:Suppose that the market risk premium is 5% and the risk-free rate is 4%. Risky assets A and B are
perfectly negatively correlated. Asset A has a standard deviation of returns of 40%, while asset B has
a standard deviation of returns of 60%. According to the CAPM, what should be the expected return
of a zero variance portfolio constructed of assets A and B?
O 5%
Ⓒ3%
O Cannot be determined
O 4%
O 2%
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