# Capital Asset Pricing Model and Answer Score Explanation Essay example

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Assignment 8

25

Tuesday

Jun 2013

Posted by preguntasdemiscursos in finance ≈ Leave a

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Your Answer Score Explanation

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.

Your Answer Score Explanation

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