CAPM Homework Exercise 8

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Description

Financial
Concepts

Portfolio
Theory, CAPM Homework

Homework
Exercise 8

Rate of Return

Year

Asset A

Asset B

Market

1

20.0%

19.0%

9.0%

2

-11.0%

22.0%

12.0%

3

10.0%

-6.0%

6.0%

4

-9.0%

-14.0%

-4.0%

5

21.0%

28.0%

17.0%

For this exercise, you might want to copy
and paste the table above into Excel and then do all your calculations on that
spreadsheet.

1)
Calculate the expected returns
for Asset A, Asset B and the Market (use
Average function in Excel)

Asset A =

Asset B =

Market =

2)
Calculate the standard deviation of returns,?, for each asset (use STDEVP function)

Asset A =

Asset B =

Market =

3)
Calculate the correlation,?, between Asset A and Asset B (use CORREL function in Excel)

? =

4)
Calculate the expected returns
from the following portfolios:

Use the following formula to calculate the
portfolio standard deviation

?P =? (wA?A)2 + (wB?B)2 +(2 wA
wB?A?B ?(A,B))

=(((wA*?A) ^ 2) + ((wB*?B)^2)+(2 *wA*
wB *?A *?B *?(A,B))))^.5

Where wA
andwBare the % of assets in Asset A and B
respectively

?A and?B are the
respective standard deviations of return
and

?(A,B)).is the correlation of
returns between asset A and B

Portfolio Expected Return

Portfolio Std Dev.

% Asset A

% Asset B

0%

100%

25%

75%

50%

50%

75%

25%

100%

0%

5) Using Portfolio Expected Returns on the Y axis and
Portfolio Standard Deviation in the X axis, draw the efficient frontier for
possible portfolio combinations of Asset A and B. (include 100% A and 100% B as two possibilities). Hint:
Use the Excel Chart Wizard and select the XY(scatter) plot option)

6)
Calculate Beta for Asset A (relative to the Market) and Asset B relative
to the Market) (use SLOPE function)

Beta
for Asset A =

Beta
for Asset B =

7)
Assume that for next year the
Risk Free Rate is expected to be 2% and that the overall Market will realize a
return of 12%. Using the CAPM / SML methodology, calculate the required
returns for Asset A and Asset B.

Required
Return for Asset A =

Required
Return for Asset B =

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