03-PS8-CAPM_sol

03-PS8-CAPM_sol - MIT Sloan School of Management J Wang E52-456 15.407 Fall 2003 Problem Set 8 Portfolio Choice Solution 1(a False Stocks with zero

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MIT Sloan School of Management J. Wang 15.407 E52-456 Fall 2003 Problem Set 8: Portfolio Choice Solution 1. (a) False. Stocks with zero beta offers the risk free rate. (b) False. Investors require a risk premium only for bearing systematic risk (undiver- sifiable or market) risk. (c) False. Since beta is linear, you can construct a portfolio with beta of 0 . 75 by buying 75% market portfolio (which has beta 1) and 25% in Tbills. 2. (BKM-revised) In 1999 the rate of return on short-term government securities (perceived to be risk-free) was about 5%. Suppose the expected rate of return required by the market for a portfolio with a beta of 1 is 13%. According to the CAPM: (a) The market portfolio has the same expected return as a portfolio of beta of 1, that is, 13%. (b) That will be the same as the risk-free asset, 5%. (c) Expected return is 13%(include dividend), and that is higher than normal for a stock with beta of only 0 . 5. Therefore the stock is underpriced. 3.
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This note was uploaded on 01/19/2011 for the course 15 15.407 taught by Professor Wang during the Fall '03 term at MIT.

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03-PS8-CAPM_sol - MIT Sloan School of Management J Wang E52-456 15.407 Fall 2003 Problem Set 8 Portfolio Choice Solution 1(a False Stocks with zero

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