Suppose there is a risk-free asset whose return is 2% and that the market portfolio has an expected return of 10%. The standard deviation of the market portfolio is given 25%. (a) Find the security market line. (b) Suppose there is an asset whose covariance with the market is given by 450%^2. Find its equilibrium price according to CAPM.
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.
Suppose there is a risk-free asset whose return is 2% and that the market portfolio has an expected return of 10%. The standard deviation of the market portfolio is given 25%.
(a) Find the security market line.
(b) Suppose there is an asset whose covariance with the market is given by 450%^2. Find its
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