Describe capital asset pricing model , Marketing Management

a.  Suppose Asset A has an expected return of 10% and a standard deviation of 20%.  Asset B has an expected return of 16% and a standard deviation of 40%.  If the correlation between A and B is 0.35, what are the expected return and standard deviation for a portfolio consisting of 30% Asset A and 70% Asset B?

b.  Plot the attainable portfolios for a correlation of 0.35.  Now plot the attainable portfolios for correlations of +1.0 and -1.0.

c.  Suppose a risk-free asset has an expected return of 5%.  By definition, its standard deviation is zero, and its correlation with any other asset is also zero.  Using only Asset A and the risk-free asset, plot the attainable portfolios.

d.  Construct a plausible graph that shows risk (as measured by portfolio standard deviation) on the x-axis and expected rate of return on the y-axis.  Now add an illustrative feasible (or attainable) set of portfolios and show what portion of the feasible set is efficient.  What makes a particular portfolio efficient?  Don't worry about specific values when constructing the graph - merely illustrate how things look with "reasonable" data.

e.  Add a set of indifference curves to the graph created for part b.  What do these curves represent?  What is the optimal portfolio for this investor?  Add a second set of indifference curves that leads to the selection of a different optimal portfolio.  Why do the two investors choose different portfolios?

f.  What is the Capital Asset Pricing Model (CAPM)?  What are the assumptions that underlie the model?

g.  Now add the risk-free asset.  What impact does this have on the efficient frontier?

h.  Write out the equation for the Capital Market Line (CML), and draw it on the graph.  Interpret the plotted CML.  Now add a set of indifference curves and illustrate how an investor's optimal portfolio is some combination of the risky portfolio and the risk-free asset.  What is the composition of the risky portfolio?

i.  What is a characteristic line?  How is this line used to estimate a stock's beta coefficient?  Write out and explain the formula that relates total risk, market risk, and diversifiable risk.

j.  What are two potential tests that can be conducted to verify the CAPM?  What are the results of such tests?  What is Roll's critique of CAPM tests?

k.  Briefly explain the difference between the CAPM and the Arbitrage Pricing Theory (APT).

l.  Suppose you are given the following information.  The beta of a company, bi, is 0.9; the risk-free rate, rRF, is 6.8%; and the expected market premium, rm-rRF, is 6.3%.  Because your company is larger than average and more successful than average (that is, it has a lower book-to-market ratio), you think the Fama-French three-factor model might be more appropriate than the CAPM.  You estimate the additional coefficients from the Fama-French three-factor model:  'The coefficient for the size effect, ci, is -0.5, and the coefficient for the book-to-market effect, di, is -0.3.  If the expected value of the size factor is 4% and the expected value of the book-to-market factor is 5%, then what is the required return using the Fama-French three-factor model?  (Assume that ai = 0.0.)  What is the required return using CAPM?

Posted Date: 3/14/2013 1:44:10 AM | Location : United States







Related Discussions:- Describe capital asset pricing model , Assignment Help, Ask Question on Describe capital asset pricing model , Get Answer, Expert's Help, Describe capital asset pricing model Discussions

Write discussion on Describe capital asset pricing model
Your posts are moderated
Related Questions
Marketing plan - Introducing Eco-Friendly Product Based on a selected company, a student is required to conduct a systemic and detailed marketing plan of a new product offering

Q. Effect on Prices in advertising? Effect on Prices:- The supporter of advertising quarrel that advertising helps to reduce prices Advertising results in decrease of per uni

States the term Product Line and discuss in brief. Product Line: This is a group of products which is closely related since they perform a similar function, targeted at s

State the term- Message content In general, there is high-involvement in many business-to- business purchase decisions hence communications tend to be much more rational and

Question 1: Leading edge companies are driving to increase profits from high yield customers. They aim to acquire and retain profitable customers and get them to spend more. Th

the value delivery process


1. List dawn and explain the advantages of integrated material management.

Question: a) Many Marketing Managers have their favorite research techniques. Some maintain that the only way to collect primary data is through in-depth, qualitative research

explain the various approaches that are followed by FMCG companies in test marketing.