Please help me answer Question #1 which consists of parts A to K. 1.Assume that

Question

Please help me answer Question #1 which consists of parts A to K.

1.Assume that the CAPM holds Portfolio a Security k (Market Portfolio) Portfolio q Security jSecurity i 1.1. Indicate whether the following statements are true or false based on what you can infer from the graph above without scaling it (a). Portfolio q has no diversifiable risk. (b). Pat 1. (c). Portfolio q is a portfolio in which we have invested positive amounts both in the risk free asset and in the market portfolico Security i has no systematic risk. (d). 1.2. Work out answers to the following based on the graph above (h). You are given that EM-Rf-4 * (E,-Rf). What percentage of the total risk of Security j as measured by the variance on returns on Security j can be diversified away? You are given that ?k returns on Security k and those on the market portfolio? You are given that Security h lies at the intersection of a horizontal line going through Security j and a vertical line going through Security k What percentage of the total risk of Security h as measured by the variance on returns on Security h cannot be diversified away? (j). 3 * ?M" What is the correlation between ((). (k). You are given that E -R, 2*(E, -R,). What is the ratio of the dollar amount borrowed on margin to the total amount invested in the market portfolio in Portfolio a?

Explanation / Answer

1.1

a) False, Portfolio q has both diversifiable risk (unsystematic risk) and non diversifiable risk (systematic risk)

b) True, As Beta of market portfolio is always 1.

c) True

d) False, Security i has no unsystematic risk.

e) False

f) True

g) False, As it will be equal to 1 because the only source of variation in the portfolios returns is variation in the returns of portfolio M i.e market portfolio.

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