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**Description**

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**Question**

Suppose that the risk%u2010free rate of interest is 5 percent, the market risk premium is 6 percent, and the market standard deviation is 20 percent. a. Plot the risk%u2010free asset and the market portfolio on coordinates with expected return on the vertical axis and total risk (standard deviation) on the horizontal axis. Plot both assets on coordinates with expected return on the axis and market risk (beta) on the horizontal axis and sketch in the security market line. b. Suppose the CAPM is correct and that an asset with a standard deviation of holding period returns of 30 percent has an expected return of 12 percent. Plot the asset on both sets of coordinates. How much of the total risk of the asset is market risk? What is the correlation between the asset and the market portfolio. c. Explain why another asset with a standard deviation of holding period returns of 30 percent could have an expected return of 10 percent. What would the asset%u2019s risk characteristics need to be? Jan 18 2014 11:15 AM

Solution ID:608802 | This paper was updated on 26-Nov-2015

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