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Quiz 4 w Answers1.html - A portfolio contains four assets...

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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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