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Unformatted text preview: Chapter 12 The Capital Asset Pricing Model 12-1. All investors will want to maximize their Sharpe ratios by picking efficient portfolios. When a riskless asset exists this means that all investors will pick the same efficient portfolio, and because the sum of all investors portfolios is the market portfolio this efficient portfolio must be the market portfolio. 12-2. a. Under the CAPM assumptions the market is efficient, that is, a leveraged position in the market has the highest expected return of any portfolio for a given volatility and the lowest volatility for a given expected return. By holding a leveraged position in the market portfolio you can achieve an expected return of [ ] ( 29 f f E R r x E R r 5% x 5% p m = +- = + Setting this equal to 12% gives 12 5 5x x 1.4 = + = So the portfolio with the lowest volatility that has the same return as Microsoft has $15,000 1.4 $21,000 = in the market portfolio and borrows $21, 000 $15,000 $6,000- = , that is -$6,000 in the in force asset., that is -$6,000 in the in force asset....
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- Spring '09