Unformatted text preview: d. Yes, portfolio risk can be eliminated if short selling is not possible, assuming there is perfect negative correlation. The calculations in Part A demonstrate this to be so. 614. According to CAPM: ) ) ( ( f m f i R R E R R+ = β 10.2% = R f + 1.2 x 6% R f = 3% E(R m) – R f = 6%, so E(R m ) = 9% 617. Weight in riskfree security = $6,000.00 ÷ ($6,000.00 + $4,000.00) = 60% Weight in market portfolio = $4,000.00 ÷ ($6,000.00 + $4,000.00) = 40% Expected portfolio return = 60%*6% + 40%*10% = 7.6% CAPM beta = (7.6%  6%) ÷ (10%  6%) = 0.40 Notice, the CAPM beta is equal to the portfolio weight invested in the market portfolio. 624. E(R) = R f + β 1 (R 1R f ) + β 2 (R 2R f ) + β 3 (R 3R f ) Market GDP Oil = 3% + (1 x 6%) + (.5 x 5%) + (2 x 4%) = 19.5%...
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 Spring '08
 roberts
 Capital Asset Pricing Model, Financial Markets, Modern portfolio theory

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