HW3 - Econ 4751 HW 3 Due on Thursday 11/12/2009 Capital...

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Econ 4751 HW 3 Due on Thursday 11/12/2009 Capital Asset Pricing Model 1. (50’) A) State carefully all the assumptions we need to derive the CAPM; B) Why every investor invests the same portfolio? What assumptions from the above do you need for your argument? C) Why every investor’s portfolio is composed of 1) the market portfolio and 2) safe asset? D) How does investor determine their portfolio weight on market portfolio? E) Set up the investor’s problem in which they freely choose the weight on safe assets and weights on all risky assets available on the market. F) Without solving the problem in E), what’s your answer? G) For the maximization problem in E), pick out any single asset, say k, and write down the first order condition for w_k. H) From the above condition, derive the weight on portfolio? And the weight on safe asset? I) Compare your answers from question D) and H). Derive the CAPM equation. 2. (20’)
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HW3 - Econ 4751 HW 3 Due on Thursday 11/12/2009 Capital...

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