1. What is the beta of a portfolio if E(RP ) = 16%, µf = 5.5%, and E(RM ) = 11%?
2. Suppose that the risk-free rate of interest is 0.03 and the expected rate of return on the market portfolio is 0.14. The standard deviation of the market portfolio is 0.12.
(a) According to the CAPM, what is the efficient way to invest with an expected rate of return of 0.11?
(b) What is the risk (standard deviation) of the portfolio in part (a)?
3. Suppose that the risk-free interest rate is 0.023, that the expected return on the market portfolio is µM = 0.10, and that the volatility of the market portfolio is σM = 0.12.
(a) What is the expected return on an efficient portfolio with σR = 0.05?
(b) Stock A returns have a covariance of 0.004 with market returns. What is the beta of Stock A?
(c) Stock B has beta equal to 1.5 and σE = 0.08. Stock C has beta equal to 1.8 and σE = 0.10.
i. What is the expected return of a portfolio that is one-half Stock B and one-half Stock C?
ii. What is the volatility of a portfolio that is one-half Stock B and one-half Stock C? Assume that the Es of Stocks B and C are in- dependent