Question

2. Company A's stock has a beta of BA 1.5, and Company B's stock has a beta of βΒ-2.5. Expected returns on this two stocks are E [rA]-9.5 and E rB 14.5. Assume CAPM holds. At age 30, you decide to allocate ALL your financial wealth of $100k between stock A and stock B, with portfolio weights wA + wB1. You would like this portfolio to be risky such that Bp- 3 (a) Solve for wA and wB- (b) State the CAPM equation (c) Given information on stock A and stock B, solve for the risk free rate rf and the expected return to the market portfolio E [rm] (Hint: two linear equations with two unknowns). 3. Asset 1 has an expected mean return of μί-10%, standard deviation of its return is σ1-7%. Asset 2 has an expected mean return of μ2-15%, with a standard deviation of σ2-12%. The correlation coefficient between returns on these two assets is P1.2 wealth on a portfolio holding only these two assets such that - -1. If you invest all your financial How should you choose weights wiand w2 such that the portfolio is risk free (ie.' ơp-0)?In that scenario, what is your expected return on that portfolio, E (rp)?

Answer 1

ComipA Comp B Beta Retuan 1. 5 2.5 14-5-1。 23 2 Duㅓ.fn eruch?»( \ CAPm equation

Asset 2 IS. 12-1 Asset 1 152. 12 그니 = 12-12 WI w, 0231 ニ-G3 ΧΙο:/. + 15./. Χ.31 = 11.85-ja