Consider a market consisting of only two assets, A and B. There are 100 shares of asset A in the market, sold at a price per share equal to $1.00. There are 100 shares of asset B in the market, with a price of $2.00 per share. Asset A has an average return rate μA = 10%, and for asset B, μB = 6%. The risk-free interest rate is R = 5%. Moreover, the standard deviation of the market return is σM = 20%. Assume that the market satisfies the CAPM theory exactly.
a. What is the expected return rate of the market portfolio?
b. Find the beta of asset A and the beta of asset B.
c. What is the covariance σMA of the market with asset A?
d. An investment opportunity in this market offers an average return μ = 6% with standard deviation σ = 19%. Would your portfolio be efficient if you invested all the money in this opportunity? Why?