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Question 2: Suppose the market portfolio has an expected return of 10% and a standard deviation of returns of 25%. The risk-free rate is 5%. Assume that the CAPM holds. a) What is the expected return of a stock that has a beta of 2? b) What is the expected return of the “best” portfolio that has a standard deviation of returns of 70%? That is, how high an expected return can you get if you are willing to hold a portfolio with σp = 70%?

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Nelly Stracke
Nelly StrackeLv2
28 Sep 2019

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(3) Assume CAPM holds. Let the expected return and standard deviation of a risky security i be µi = 0.12 and σi = 0.25 respectively. The market portfolio M has the expected return µM = 0.1 and standard deviation σM = 0.15. The risk-free rate is r = 0.06. What proportion of the risk for security i is systematic risk?

Please comment the following statement

1) The expected return of zero beta security is zero;

2) According to CAPM, the higher the standard deviation, the higher the expected return.

3) You could invest 20% on market portfolio and 80% on risk free asset to make the beta of your portfolio being 0.8

4) A security with positive standard deviation should have expected return greater than risk free rate. Otherwise nobody will hold it.

Please comment the following statement

1) The expected return of zero beta security is zero;

2) According to CAPM, the higher the standard deviation, the higher the expected return.

3) You could invest 20% on market portfolio and 80% on risk free asset to make the beta of your portfolio being 0.8

4) A security with positive standard deviation should have expected return greater than risk free rate. Otherwise nobody will hold it.

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