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Unformatted text preview: portfolio is not efficient. Efficient portfolios have the same Sharpe ratio as the market. 2. The expected market risk premium is E(R M-R f ) = 9%. The variance of the market is 0.0484. Assume that the CAPM holds. Suppose that an efficient portfolio P has a standard deviation σ P = 30%, and a correlation with the market portfolio of 0.55. Compute the beta and the expected risk premium of portfolio P. bp = Cov(Rp, Rm)/V(Rm) = Corr(Rp, Rm)*SD(Rp)*SD(Rm)/V(Rm) = Corr(Rp, Rm)*SD(Rp)/SD(Rm) = 0.55*0.30/sqrt(0.0484) = 0.75 E(Rp-Rf) = bp*E(Rm-Rf) = 0.75*0.09 = 0.0675 3. Assume that the CAPM holds. a) Is this situation possible under the CAPM: If two assets have the same beta, they must have the same risk premium under the CAPM. So this situation is not possible. b) Is this situation possible under the CAPM: For B, E(RB-Rf) = bB*E(Rm-Rf) = 0.45*0.07 = 0.0315 Since this is not equal to 0.0355, this situation is not possible....
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- Spring '09
- Variance, Probability theory, Modern portfolio theory, sharpe ratio