Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. 2. [21 marks] in simpleland, there are only two ri

2. [21 marks] In Simpleland, there are only two risky assets in the market, A...

90.2K

Verified Solution

Question

Finance

image

2. [21 marks] In Simpleland, there are only two risky assets in the market, A and B. The information and CAPM estimates of A and B are shown in the following table: A B Market Capitalisation ($) 100 Million 400 Million Variance (62) 0.09 0.01 Covariance between A and B 0.2 Expected Return on Market 20% Risk free rate 10% The manager believes that in the near future, B will outperform A by 5% with uncertainty measured in variance 0.0005. He has also assigned the error of estimating the above CAPM model in terms of variance to be 0.01, i.e. t = 0.01. a) What is the expected return of A and B under CAPM? [5] 2. [21 marks] In Simpleland, there are only two risky assets in the market, A and B. The information and CAPM estimates of A and B are shown in the following table: A B Market Capitalisation ($) 100 Million 400 Million Variance (62) 0.09 0.01 Covariance between A and B 0.2 Expected Return on Market 20% Risk free rate 10% The manager believes that in the near future, B will outperform A by 5% with uncertainty measured in variance 0.0005. He has also assigned the error of estimating the above CAPM model in terms of variance to be 0.01, i.e. t = 0.01. a) What is the expected return of A and B under CAPM? [5]

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students