FIN2020 EXERCISE 3
1.Consider a portfolio of 300 shares of firm A worth $10/share and 50 shares of firm B worth $40/share.You expect a return of 8%for stock A and a return of 13%for stock B.
(a)What is the total value of the portfolio, what are the portfolio weights and what is the expected return?
(b)Suppose firm A's share price goes up to $12 and firm B's share price falls to $36.
What is the new value of the portfolio? What return did it earn? After the price change, what are the new portfolio weights?
2.The Capital Asset Pricing Model
Suppose that the random return rm on the market portfolio has expected value E(rm)=0.07 and variance σ2M = 0.02 and that the return on risk-free assets is rs =0.02.
a.According to the capital asset pricing model,if a risky asset has a random return r;with
expected value E(j)=0.145,what is the numerical value of this asset's beta β;?
b.According to the capital asset pricing model,what is the numerical value of the covariance between this risky asset's random return r;and the random return Fm on the market portfolio?
c.According to the capital asset pricing model,if another risky asset has a random return rg with expected value E(rk)=0.01,what is the numerical value of this asset's beta β?