Answer:
1. If all market participants have homogeneous beliefs , they hold Dell and IBM in same proportion in their optimal risky portfolios. If assume that Dell stock Sells for $ 30 and IBM for $ 50 per share. Then the ratio of number of shares available in the market for Dell and IBM be :
Dell : IBM
50 X 60% : 30 X 40%
30 : 12
5 : 2
That means 5 stocks of Dell to 2 stocks of IBM
2. First we need to calculate covarianceD I :
Here we use D for Dell and I for IBM
covarianceD I = Correlation coefficient of D ,I X = 0.25 X 0.20 X 0.15 = 0.0075
Beta of Dell ( ) = covarianceD I / Variance of D = 0.0075 / ( 0.20 - 0.10 ) = 0.075 if round off then 0.08
3. CAPM for Dell =
= = 2% + ( 0.08 x ( 10% -2% ) = 2.64 %
CAPM does not hold for Dell as Market expects the 10% return at 60% that means 6% return ( 10% x 60% ) and as per CAPM model the return is 2.64% which is lesser
4. First we calculate Beta of IBM
Beta of IBM ( ) = covarianceD I / Variance of I = 0.0075 / ( 0.15 - 0.06 ) = 0.083
CAPM for IBM =
= = 2% + ( 0.083 x ( 16% -2% ) = 2.332 %
CAPM may hold for IBM as Market expects the 6% return at 40% that means 2.4% return ( 6% x 40% ) and as per CAPM model the return is 2.332% which is closer to expected return
For Dell, suppose its mean and standard deviation are 10% and 20%. For IBM, suppose its...
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