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PracticeSet3

# PracticeSet3 - Finance 261 Practice Set 3 Supplementary...

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Finance 261 Practice Set 3 – Supplementary Examples 1. Assume the risk free rate is 7%, the estimated return on the market is 12% and the standard deviation of the market’s expected return is 21%. Calculate the expected return and risk (standard deviation) for the following portfolios: (a) 60% of investable wealth in risk free assets, 40% in the market portfolio (b) 150% of investable wealth in the market portfolio. (c) 100% of investable wealth in the market portfolio 2. Assume that the shares of CCL are priced in equilibrium. The company’s expected return next year is 14% and its beta is 1.1. The risk free rate is 6%. (a) Calculate the slope of the SML. (b) Calculate the expected return on the market. 3. Choose the portfolio from the following set that is not on the efficient frontier a. Portfolio A: E(R) = 10%, σ = 8% b. Portfolio B: E(R) = 18%, σ = 13% c. Portfolio C: E(R) = 38%, σ = 32% d. Portfolio D: E(R) = 15%, σ = 14% e. Portfolio E: E(R) = 26%, σ = 20% 4. Given the following information: E(R m ) = 10%, σ m = 23%, R f = 6%, σ A = 20% ρ AB = .65 σ B = 31% , ρ A,M = .9, ρ B.M = .5 a) Calculate the betas for each of securities A and B.

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