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Chapter 12
The Capital Asset Pricing Model
121.
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.
122.
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
[]
()
ff
ER
r xER
r
5% x 5%
pm
=+
− =
+×
⎡⎤
⎣⎦
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.
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This note was uploaded on 10/08/2010 for the course ENGIN 120 taught by Professor Ilan during the Spring '08 term at University of California, Berkeley.
 Spring '08
 ILAN

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