Chap6 Questions - T HE E CONOMICS OF F INANCIAL M ARKETS R....

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
THE ECONOMICS OF FINANCIAL MARKETS R. E. BAILEY Exercises for Chapter 6 The capital asset pricing model 1. The following information is provided for a stock market: μ j β j Asset 1 6.6% 0.4 Asset 2 9.8% 1.2 Asset 3 12.2% 1.8 Notation: μ j = expected rate of return on asset j ; β j = beta-coefficient for asset j , j = 1 , 2 , 3 . (a) In the context of the Capital Asset Pricing Model (CAPM), define the ‘beta-coefficient’, β j , corresponding to asset j . Discuss how assets’ beta-coefficients should be interpreted and explain how their values can be obtained in practice. (b) Assuming that a risk-free asset is available, explain and interpret the Security Market Line (SML) in the context of the CAPM. Construct the SML from the given information and interpret the values of its coefficients. (c) Now suppose a risk-free asset is not available, although the other assumptions of the CAPM remain valid. How should the SML be constructed and interpreted in this case?
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.
Ask a homework question - tutors are online