Tutorial 5, CAPM
Investments

Problem 1

Part B

(Exercise n. 4, 8.a, and 8.b in the book). • What must be the beta of a portfolio with E(rp ) = 20%, if rf = 5% and E(rm ) = 15% ? • Consider the following table, which gives a security analyst’s expected return on two shares for two particular market returns

Market Return 5% 20%

Aggressive share 2% 32%

Defensive share 3.5% 14%

– What are the betas of the two shares? – What is the expected rate of return on each share if the market return is equally likely to be 5% or 20% ?

......... Problem 2 Part A.1

(Exercise n. 8.c and 8.d in the book). Continuing from Part B... • If the T-note rate is 8% and the market return is equally likely to be 5% or 20%, draw the SML for this economy • Plot the two securities on the SML graph. What are the alphas of each?

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Problem 4

2

Problem 3

Part A.2

(Exercise n. 9, 10, 11, 12, 13, 14 and 15 in the book)

......... Problem 4 Part A.3

(Exercise n.19.a the book) Two investment advisers are comparing performance. One averaged a 19% return and the other a 16% return. However, the beta of the first adviser was 1.5 while that of the second was 1. • Can you tell which adviser was a better selector of individual shares (aside from the issue of general movements in the market)?

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Investments

Tutorial 5, CAPM