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For this question, we assume that the CAPM holds. Suppose that you can invest in...

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Finance

image For this question, we assume that the CAPM holds. Suppose that you can invest in two securities, A and B. You collect the following information on the two securities: where E[Ri],i, and i2 denote the average return, the standard deviation of returns, and the amount of idiosyncratic risk of security i, respectively. The standard deviation of the market portfolio is M=0.25 and the correlation between security A and the market portfolio is AM=0.5. (a) What is the amount of idiosyncratic risk of each security, ,i2 ? (b) What is the CAPM of security B, assuming the beta of security B is positive? (c) What are the risk-free rate and market risk premium? (d) You create a portfolio P that invests an equal amount of money in each security. i. What is the CAPM of portfolio p ? ii. Portfolio p has an amount of idiosyncratic risk, ,p2, that represents 10% of the total portfolio risk p2. What is the correlation between securities A and B

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