FIN2020 EXERCISE 3

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FIN2020 EXERCISE 3

1.Consider a portfolio of 300 shares of firm A worth $10/share and 50 shares of firm B worth $40/share.You expect a return of 8%for stock A and a return of 13%for stock B.

(a)What is the total value of the portfolio, what are the portfolio weights and what is the expected return?

(b)Suppose firm A's share price goes up to $12 and firm B's share price falls to $36.

What is the new value of the portfolio? What return did it earn? After the price change, what are the new portfolio weights?

2.The Capital Asset Pricing Model

Suppose that the random return rm on the market portfolio has expected value E(rm)=0.07 and  variance σ2M = 0.02 and  that  the  return  on  risk-free  assets  is  rs  =0.02.

a.According to the capital asset pricing model,if a risky asset has a random return r;with

expected  value  E(j)=0.145,what  is  the  numerical  value  of  this  asset's  beta   β;?

b.According to the capital asset pricing model,what is the numerical value of the covariance between this risky  asset's  random  return  r;and the random return  Fm  on  the  market portfolio?

c.According to the  capital  asset pricing model,if another risky  asset has  a  random return rg  with  expected  value  E(rk)=0.01,what  is  the  numerical  value  of  this  asset's  beta β?