Suppose the CAPM is true. Consider two assets, X and Y, and the market M. Suppose cov(X,M) = .3, cov(Y,M) = .5. %3D (a) Is the expected return higher on X or Y? (b) Suppose var(M) = 1.5, what are the betas of X and Y? %3D (c) Suppose the expected market return is 20% and the risk free rate is 5%, what is the expected returns of X and Y?. (d) Given your analysis in (a)-(c), what type of investor would prefer asset X to asset Y?

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A: Beta is a measure of a security's or portfolio's volatility (or systematic risk) in comparison to…

Q: a) Suppose the risk-free rate is `X'% and the expected rate of return on the market portfolio is…

A: Since you have asked multiple questions, we will solve the first question for you. If you want any…

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A: The market risk premium and required return for securities can be calculated with the help of CAPM…

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A: Risk Free Rate = 6% Expected Return on market portfolio = 13.5% Beta = 1.29

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A: Hi Student,Thanks for the questions. As per Bartleby answering guidelines we can answer only the…

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A: Detailed ExplanationThe statement is not entirely accurate. The Capital Asset Pricing Model (CAPM)…

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A: The risk free rate can be calculated as per the capital asset pricing model.

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A: As per Security Market Line(SML), E(k) = kf + [ b x (E(kM) - kf) ]WhereE(k)= Expected return on…

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A: Given, Beta = 1.2 Risk free rate = 4.3% Market return = 12%

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A: The model that explains the association between expected return and systematic risk is called the…

Q: Suppose an investment is equally likely to have a 24% retu - 8% return, or a 6% return. The expected…

A: r1=24%r2=-8%r3=6%All equal likely

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A: The Capital Allocation Line (CAL) is a crucial concept in finance that illustrates the trade-off…

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A: The expected rate of return on a stock can be calculated using the Capital Asset Pricing Model…

Q: d) The return on the risk-free asset is 5%. You are given the following information: Security Firm A…

A: Risk free rate (Rf) = 0.05Market return (Rm) = 0.12Market standard deviation (Sm) = 0.20

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A: CAPM model is introduced to measure the minimum required return rate using the following values and…

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A: Formula:- Required return = Risk free rate + beta*(market rate- risk free rate)

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A: Expected return is calculated by using CAPM equation. CAPM measures systematic risk Expected return…

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A: Such a portfolio is constructed using 'Solver' of excel. It is found under 'Data' tab.

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A: Treynors ratio: Treynors ratio is used to measure the performance of the company. It is the ratio of…

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A: 1 )  Required rate of return = Risk free + Beta × Risk Premium  Risk Free Rate = 6% Risk Premium =…

Q: 9) Firm X and Y each have a beta of 1.5 and 2.5. If their expected return (cost of equity) is each…

A: CAPM = Rf + Beta ( Rm - Rf)

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.