Question

Which of the following are assumptions of the Capital Asset Pricing Model (CAPM)? Check all that apply. O Asset quantities are given and fixed. There are no transaction costs. Taxes are accounted for. All investors focus on a single holding period. O Consider the equation for the Capital Asset Pricing Model (CAPM): Cov(ri, rm) ři = rre + Cím – PRF) x In this equation, the term Cov(ri, rm) / om represents the Suppose that the market's average excess return on stocks is 12.00% and that the risk-free rate is 1.00%. Complete the following table by computing expected returns to stocks for each beta coefficient using the Capital Asset Pricing Model (CAPM):

Answer 1

ane the assumph The rollowing of the CARá Models 1Jovestors ane. nahonal They desime Thin her neturn forn ony acleptable level of 9risk ond lower Misk ton ony droimed level d retun. weath 2. Theity objective is maximum. 3. Theit choice is based on gisk ond get f the serurdly 4 They hove bomDgenecus expectoiuns d rist Land getun oveé identicol Fime hosison 5 Ifonmotion is dredly & simultone oush, Lovoilobde to all investors. G Iovestors con bomaw f lend unlimited omand of gnisk-dere rate No toces tononsaction cwst. 8 Asseds age mosikedotde f divisible. 9. Stcunities mokats are fhient ond a single investor con not olfect the pri 1o No Restaiction pA shoot selling

AL investoxs come icieadly divurfed nd hove climinadud the oyalemait nck Thus, only plemahie nlat is relesant in deltnming the cdirnated hotunn. Canendening otowt oaomphons, the There ane no tha0saction cote. there optione do not huled good bos. > Asset quantitte3 cote not ficesd. ane No darAS. s There → goverstor sinale holig సంత fuson be poniod. O o Ahe equation. Conlts Yn) vepresonk 3. Beta Corfficiend.

Covani ance Voniance. O Given that Monkat gnetuon )= 12% Risk free roe Cop expectad meduras wh colealoion whe -0.3 E(R) = It (-08) (12-1) 3.3 -2.3% on -0.028 b) b; EIR) I+ O.5( 12-1) EIR) = .0GS.

bi 1.00 It I (12-) 12% d) b; It 5(12-1) 56% 0:56. Sctumpmetation of Beta (@) otugre Snrorportahios. Sవ Belou Oveng grick (deknsive Serunike) b) Vnichy grisk Arnoge srak Abuve carerge misk 30 where b <\, it means the stock is manked. l0s3 volatile thhan the