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Unformatted text preview: FNCE 3010 (Durham) HW 10 (CAPM) 1. Is it possible that a risky asset could have a beta of zero? Explain. Based on the CAPM, what is the expected return on such an asset? Is it possible that a risky asset could have a negative beta? What does the CAPM predict about the expected return on such an asset? Why might an investor be willing to hold such an asset? Solution: A risky asset can have zero beta if its returns are not correlated with the market. In other words, it has only idiosyncratic risk. Its expected return should be equal to the risk-free rate. It is possible to have a negative beta if the asset’s returns are negatively correlated with the market. The expected return would be less than the risk-free rate. Investors might be willing to hold such an asset because of its value as a diversification instrument. 2. Is it possible to eliminate idiosyncratic risk by carefully choosing a portfolio? Is it possible to eliminate systematic risk? What are the implications for expected returns in either case....
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- Fall '07
- Corporate Finance, Modern portfolio theory, idiosyncratic risk, Snazzle