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A portfolio contains four assets in equal weights:
Asset 1 has a beta of 0.5.
Asset 2 has a beta of 0.8.
Asset 3 has a beta of 1.2.
Asset 4 has a beta of 1.5.
If the portfolio’s required return is 9.2% and the riskfree rate is 4%, what is Asset 2’s required return?
Answer 1
Equally weighted portfolio beta: (0.5 + 0.8 + 1.2 + 1.5)/4 = 1.0
Using CAPM, 0.092 = 0.04 + 1*MRP. That is, MRP = 0.052.
Thus, r_Asset_2 = 0.04 + 0.8*0.052 = 8.16%
Question 2
There are two possible states of the economy. State 1 has a 40% chance of occurring.
In state 1, Asset A returns 5%, Asset B returns 8%, and Asset C returns 12%.
In state 2, Asset A returns 3%, Asset B returns 1%, and Asset C returns 2%.
A portfolio is invested 20% in Asset A, 30% in Asset B, and 50% in Asset C.
What is the standard deviation of C’s returns?
Answer 2
See Quiz 4 spreadsheet for the answer.
Question 3
There are two possible states of the economy. State 1 has a 40% chance of occurring.
In state 1, Asset A returns 5%, Asset B returns 8%, and Asset C returns 12%.
In state 2, Asset A returns 3%, Asset B returns 1%, and Asset C returns 2%.
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 Summer '11
 Mahmood
 Standard Deviation

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