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The returns on asset X and the market portfolio M are related as: RX = 0.01 + 0.8Rm + 0.2? where ? is a standard normal variable and uncorrelated with Rm. The expected return on the market portfolio is 15% with a standard deviation of 20%.
A) What is the beta of asset X?
B) Construct the minimum variance portfolio using Rx and Rm
C) Using Rx and Rm, construct the mean-variance efficient portfolio with a target return of 16%. Do you need to have a short position in asset X and/or the market portfolio? what is the risk of the portfolio?
D) Assume there is a risk-free asset and CAPM hold. What is the risk free rate? Is asset X mean-variance efficient? If not, can you find a mean-variance efficient portfolio that has the same expected return as asset X with less risk?
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