CAPM can Trace its Development from Portfolio Theory

Answer for CAPM can Trace its Development from Portfolio Theory in $1 Only (Instant Download)

Portfolio Theory

CAPM can trace its development from Portfolio Theory (i.e. the two fund separation theorem) which shows that the process of optimizing the return/risk ratio will ensure that every investor will invest in a portfolio of risk free asset and the risky market portfolio (also known as the two fund separation theorem). Explain and illustrate with a graph why no one will invest in other risky portfolios other than the market portfolio. Why would every tradable asset in the market be included in this market portfolio? (No more than half pages).

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Market Portfolio Has an Expected Return

Answer of Market portfolio has an expected return for $2 Only (Instant Download)

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Market portfolio has an expected return of 11% and volatility of 20%. Risk-free rate is 3%. Security X and Y have betas of 1.4 and 0.9 respectively.

a) According to CAPM, what are the expected return of X and Y?

E(rm)-rf = 11% – 3% = 8%

3% +1.4*8% = 14.2%

3% +1.4 *8% = 10.2%