Question

X Yand Zare portfolios of securities. Data pertaining to these portfolios and the market portfolio are given in the following table: Std dev(R 0.28 Cov(Ri Rm Portfolio E(RD Beta P p.m X 0.015 Y 0.23 ? 0.17 1.5 0.92 0.048 0.34 ? M ? 0.10 2 0.02 Also Cov(Rs.Ry= 0.04 REQUIRED risk free Calculate the rate of return on a (a) Fill in the missing figures (indicated by question mark) (c) asset (b) Compare the betas and standard deviations of X& Y How do you explain the fact that X has a lower beta than Yyet a much higher standard deviation? Consider portfolio P below. Without doing any calculations, what is its' beta? (d) Std dev(R Portfolio ER .125 beta P 0.30 The beta of a portfolio comprising of 60% of X and 40% of Y Calculate E(Rp) and the Covariance with the market of the portfolio created in (e). Is the portfolio in (e) efficient? Show calculations Without doing any calculations, what can you say about how efficient Portfolio P is? (e) (g) N

For this question, i have trouble doing the first one. Can you please explain how can i get the RATE OF RETURN FOR RF?

Thanks

Answer 1

For market, variance=covariance(RiRm)
We know beta=covariance(Ri,Rm)/variance(Rm)=0.048/0.02=2.4

Required return=risk free+beta*(market return-risk free return)

For Z:
0.17=-1.4*risk free+2.4*0.10
=>risk free=(0.17-2.4*0.10)/(-1.4)
=>risk free=0.05