# Capital Asset Pricing Model and Answer Score Explanation Essay example

1215 Words Mar 22nd, 2014 5 Pages
(10 points) Suppose CAPM works, and you know that the expected returns on Walmart and Amazon are estimated to be 12% and 10%, respectively. You have just calculated extremely reliable estimates of the betas of Walmart and Amazon to be 1.30 and 0.90, respectively. Given this data, what is a reasonable estimate of the risk-free rate (the return on a long-term government bond)? (Enter the answer with no more nor less than two decimal places, and leave off the % sign. For example, if your answer is 13.97% you should enter it as 13.97 NOT 0.14 nor 14)ABOUT mensajeantonio ~ Smile! You’re at the best WordPress.com site ever
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Assignment 8
25
Tuesday
Jun 2013
Posted by preguntasdemiscursos in finance ≈ Leave a
(No more than two decimals in the percentage return, but do not enter the % sign.)

5 10.00 Correct. You understand that linear relations (like the CAPM) are easy to work with.
Total 10.00/10.00
Question Explanation
Testing your understanding of the CAPM and its key determinants.
Question 9

(10 points) The standard deviation of a portfolio’s return is the weighted average of the standard deviations of the returns of all securities in the portfolio, where the weights are proportional to the amount of your investment in a security relative to your total investment.

False 10.00 Correct. You have internalized diversification and the relation between the risk of a portfolio and individual securities.
Total 10.00/10.00
Question Explanation
Again, a basic but important, relation between the risks of portfolios and individual securities. Go back to basics.
Question 10

(15 Points) Your own company has been very successful in producing and selling rocket engines. Given that airplane engines are not that cheap, and the airline industry is extremely sensitive to the market, the beta of your company is 2.50. The market risk premium (the average/expected difference between the market return and the risk-free rate) is 4.00% and the return on a long-term government bond is 2.50%. You have

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