Describe capital asset pricing model , Marketing Management

Assignment Help:

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?


Related Discussions:- Describe capital asset pricing model

Principle of marketing, Place/distribution is a crucial aspect ofof the mar...

Place/distribution is a crucial aspect ofof the marketing mix.discuss this marketing mix variable and show how attention to it product to the consumer.

Product planning, Product Planning : To perform the responsibilities th...

Product Planning : To perform the responsibilities the marketing managers follow  a  marketing  process  and  the  product managers  come  up  having  a marketing plan for indi

Define the strategy development phase in brief, Define the Strategy Develop...

Define the Strategy Development Phase in brief. Phase Strategy Development Phase: If you already know your competitors and target market, you are capable to start creatin

Functions of headlines, Functions of Headlines:- To pull attention ...

Functions of Headlines:- To pull attention of audience To highlight major features of the product To give major message of the ad in brief To stimulate interest

What is meant by power in organisations, Question 1 (i) What is meant ...

Question 1 (i) What is meant by ‘power' in organisations? (ii) Examine the main sources of power in organisations. (iii) In what ways might organizational sub-units ge

Concept of rules and discretionary central banking policies, Question 1: ...

Question 1: (a) Clearly explain the concept of rules versus discretionary central banking policies. (b) Discuss the various risks faced by the financial system and disc

Lead time management, impact of having inadequate system design in the lead...

impact of having inadequate system design in the lead time and engineering cost

What are the important facts of marketing, What are the Important facts of ...

What are the Important facts of marketing Marketing identifies consumers' needs and supplies different goods and services to satisfy those needs most effectively. So businessma

Assignment, How should price be set on a product or service for the first t...

How should price be set on a product or service for the first time?

Illustrate the monitoring performance phase, Illustrate the Monitoring Perf...

Illustrate the Monitoring Performance Phase? Monitoring Performance Phase: If you have an internet marketing plan, then you can start implementing this right away. The f

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd