(2) Consider a market consisting of only two stocks labeled 1 and 2. In the mark
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Question
(2) Consider a market consisting of only two stocks labeled 1 and 2. In the market, there are 100 shares of stock 1 sold at $1 per share, and 100 shares of stock 2 with $2 per share. Let the expected returns be µ1 = 10% and µ2 = 6% respectively. Also let the risk-free interest rate be r = 5%, and the standard deviation for the market portfolio M be M = 20%. Assume the market satisfies the CAPM theory.
(2a) Find the expected return µM of the market portfolio.
(2b) Find the beta values 1 and 2.
(2c) Find the covariance 1M between stock 1 and M.
(2d) Suppose an investment opportunity in this market offers an expected return µ = 6% with standard deviation = 19%. Would your portfolio be efficient if you invest all the money in this opportunity? Why?
just need part d
Explanation / Answer
d)
For portfoilio, Expected returns is 7.3% and std devn is 20%
For investment opportunity Expected returns is 6% and std devn is 19%
Comparing two means (returns), it is safer to conclude that the portfolio offers better returns.
retruns weight weight * return 10% 1/3 3.3% 6% 2/3 4.0% 7.3%Related Questions
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