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  • 7 - R&R SML Assignment

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    Zach Rai
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    Asset W has an expected return of 11.6% and a beta of 1.30 in a market with a 3.8% risk-free rate. The slope of the Security Market Line is the market risk premium, which is the expected return of the market minus the risk-free rate. This determines the expected return of portfolios combining Asset W and the risk-free asset. The question also provides beta and expected return information for two securities, Pest Corp and Rat Co, and asks what the risk-free rate and market return must be if they are correctly priced according to the CAPM.

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    Asset W has an expected return of 11.6% and a beta of 1.30 in a market with a 3.8% risk-free rate. The slope of the Security Market Line is the market risk premium, which is the expected return of the market minus the risk-free rate. This determines the expected return of portfolios combining Asset W and the risk-free asset. The question also provides beta and expected return information for two securities, Pest Corp and Rat Co, and asks what the risk-free rate and market return must be if they are correctly priced according to the CAPM.

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    4 views2 pages

    7 - R&R SML Assignment

    Uploaded by

    Zach Rai
    Asset W has an expected return of 11.6% and a beta of 1.30 in a market with a 3.8% risk-free rate. The slope of the Security Market Line is the market risk premium, which is the expected return of the market minus the risk-free rate. This determines the expected return of portfolios combining Asset W and the risk-free asset. The question also provides beta and expected return information for two securities, Pest Corp and Rat Co, and asks what the risk-free rate and market return must be if they are correctly priced according to the CAPM.

    Copyright:

    © All Rights Reserved
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    COMM 298 205 2022W2 – Assignment 7: Risk and Return Part 2

    Name:

    Asset W is correctly priced and has an expected return of 11.6% and a beta of 1.30. If the risk-
    free rate is 3.8%
    1. a. What is the slope of the SML? What is the significance of the slope of the line for any
    portfolio consisting of the risk-free asset and Asset W?

    1.b Complete the following table for portfolios of asset W and a risk-free asset.

    Portfolio Beta
    % Weight in % Weight in ßp Expected return of
    Asset W Rf portfolio
    0% ###
    50% ###
    100% ###
    150% ###
    2. Suppose you observe the following situation:

    Security Beta Expected return


    Pest Corp. 1.35   14.50%
    Rat Co. 1.04   11.80 

     
    a. Assume these securities are correctly priced. Based on the CAPM, what is the risk free
    rate?
     

    b. What is the expected return on the market? 

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