Problem 12-9 APT Assume that the following market model adequately describes the

Question

Problem 12-9 APT

Assume that the following market model adequately describes the return generating behavior of risky assets:

Calculate the standard deviation of returns for each asset. (Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16))

Calculate the variance of return of three portfolios containing an infinite number of asset types A , B , or C , respectively. (Do not round intermediate calculations.Round your answers to 6 decimal places. (e.g., 32.161616))

Assume the risk-free rate is 4.6 percent and the expected return on the market is 10.6 percent. What is the expected returns of each assets? (Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16))

Assume that the following market model adequately describes the return generating behavior of risky assets:

Explanation / Answer

C-1)

Computation of the expected return is as follows:

For asset A:

Risk free rate + Beat*(Risk free rate-Market rate)

=4.6+0.81(10.6-4.6)

=9.46%

For asset B:

Risk free rate + Beat*(Risk free rate-Market rate)

=4.6+1.2(10.6-4.6)

=11.8%

For asset C:

Risk free rate + Beat*(Risk free rate-Market rate)

=4.6+1.67(10.6-4.6)

=14.62%

C-2)

Since, the expected return is low for the asset A; investor will not accept the asset A.

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