ZuoTi.Pro
Question

What are the crucial assumptions that underlie the Two-Fund separation result upon which the CAPM is based? (Note: Two-Fund s
business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Solution:

Two fund seperation assumptions:

The input data i.e mean vector and covariance matrix of asset returns are known. Data analysis is done from historical data. Sometimes due to uncertainities and problems there are chances of error for the input data.

If assumptions are violated, breaking down process is given below:

We have to find the portfolio of risky assets that tries to maximise the worst case Sharpe Ratio - over all assets returns.

Post above, decide risky asset and risk free asset.

Risky asset will be the tangency portfolio of the least favorable asset returns.

  

0 0
Add a comment
Know the answer?
Add Answer to:
What are the crucial assumptions that underlie the Two-Fund separation result upon which the CAPM is...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Capital Asset Pricing Model (CAPM) a. What is two-fund portfolio separation and why is it important?...

    Capital Asset Pricing Model (CAPM) a. What is two-fund portfolio separation and why is it important? b. Show graphically (in return-standard deviation space) how 2-fund separation works in the context of the CAPM. c. Explain and show how risk averse investors are better off with capital markets. d. What are some of the assumptions that need to hold in order for the CAPM to be applied and why are they important? e. Suppose a stock has a covariance with the...

  • 5. Capital Asset Pricing Model (CAPM) a. Explain why it is important to assume that investor's...

    5. Capital Asset Pricing Model (CAPM) a. Explain why it is important to assume that investor's already hold the value-weighted "market", or tangency, portfolio in order to apply the Capital Asset Pricing Model (CAPM). b. Does the risk-free asset need to exist in order for us to derive the CAPM? If not, how do investors achieve 2-fund separation? (Hint: Your textbook can help with this.)

  • Which of the following are assumptions of the Capital Asset Pricing Model (CAPM)? Check all that...

    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...

  • Which of the following are assumptions of the Capital Asset Pricing Model (CAPM)? Check all that...

    Which of the following are assumptions of the Capital Asset Pricing Model (CAPM)? Check all that apply.Investors assume that their investment activities won't affect the price of a stock.There are no taxes.Assets won't be short sold.Asset quantities aren't given.Consider the equation for the Capital Asset Pricing Model (CAPM):$$ \hat{r}_{1}=r_{R F}+\left(\hat{r}_{M}-r_{R F}\right) \times \frac{\operatorname{Cov}\left(r_{i}, r_{M}\right)}{\sigma_{M}^{2}} $$In this equation, the term \(r_{R F}\) represents therate of return on a risk-free bondSuppose that the market's average excess return on stocks is 6.00 %...

  • 29) Which of the following statements is FALSE? A) The Sharpe ratio of the portfolio tells us how much our expected...

    29) Which of the following statements is FALSE? A) The Sharpe ratio of the portfolio tells us how much our expected retun will increase for a given increase in volatility B) We should continue to trade securities until the expected r return of each security equals its required return. Q) The required return is the expected return that is necessary to compensate for the risk that an investment will contribute to the portfolio. D) If security is required retun exceeds...

  • Question 1. (15 marks) Mr. Horsefield, the manager of Solomon Mutual Fund Co., expects to evaluate...

    Question 1. (15 marks) Mr. Horsefield, the manager of Solomon Mutual Fund Co., expects to evaluate the return and risk of several possible portfolios through the relationships among the risk-free rate of return, market rate of return, market risk premium, and systematic risk. Then, the manager finds that the risk-free rate of return is equal to 4% annually, the average return rate of market is 13%. The manager also collects that each of the three targeting portfolio consists of the...

  • For Dell, suppose its mean and standard deviation are 10% and 20%. For IBM, suppose its...

    For Dell, suppose its mean and standard deviation are 10% and 20%. For IBM, suppose its mean and standard deviation are 6% and 15%. Their correlation coefficient is 0.25. The risk-free rate is 2%. The optimal risky portfolio consists of 40% in IBM and 60% in Dell. [Note: This is an important exercise to obtain some intuition about CAPM. However, neither the formulas in Part 2 nor the algebraic proof in Part 5 are required for this course. If I...

  • Need help on these 4 multiple choice questions please! 2 Marks and has only one correct...

    Need help on these 4 multiple choice questions please! 2 Marks and has only one correct answer. 1. Which of the following is NOT an advantage of investing in an open-end mutual fund A. Professional management B. Daily liquidity C. You can buy units of the fund on margin or sell short D. Provides an opportunity to easily invest in global markets E. None of the above. All are advantages of investing in open-end mutual funds rou purchased a mutual...

  • od The capital asset pricing model (CAPM) explains how risk should be considered when stocks and...

    od The capital asset pricing model (CAPM) explains how risk should be considered when stocks and other assets are held -Select- The CAPM states that any stock's required rate of return is -Select the risk-free rate of return plus a risk premium that reflects only the risk remaining -Select- diversification. Most individuals hold stocks in portfolios. The risk of a stock held in a portfolio is typically -Select the stock's risk when it is held alone. Therefore, the risk and...

  • 1. The CFO of MediSearch plc believes that investing into a project which will develop a...

    1. The CFO of MediSearch plc believes that investing into a project which will develop a new drug for fighting the flu virus, promises a long-term annual return of 8%. The expected return of the market index is RM = 17.9%, the volatility of the market index is σM  = 9.5%, and the risk-free asset earns Rf = 5.2%. The CFO has studied similar projects of other companies and believes that the covariance between the returns of this project and the...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT