Transcription of Capital Asset Pricing Model Homework Problems
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Capital Asset Pricing Model Homework ProblemsPortfolio weights and expected return1. Consider a portfolio of 300 shares of firm A worth $10/share and 50 shares of firm Bworth $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 isthe expected return?(b) Suppose firm A s share price goes up to $12 and firm B s share price falls to $ is the new value of the portfolio? What return did it earn? After the pricechange, what are the new portfolio weights?2. Consider a portfolio of 250 shares of firm A worth $30/share and 1500 shares of firm Bworth $20/share.
The risk-free rate is 2%. (a) What is the expected return and volatility of the market portfolio (which is a 50-50 combination of the two portfolios)? (b) Does CAPM hold in this economy? Improving the Sharpe ratio 22. Suppose portfolio P’s expected return is 14%, its volatility is 30% and the risk-free rate is 2%.
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