Assignment:
CAPMThe expected rates of return on the French firms Publicis and Renault, the market portfolio (CAC 40) and the risk-free asset are given below, along with the standard deviations of these returns.
Publicis: Expected Return(%) = 17 Standard deviation(%) = 40
Renault: Expected Return(%) = 10 Standard deviation(%) = 20
CAC 40: Expected Return(%) = 14 Standard deviation(%) = 17
Risk free asset: Expected Return(%) = 3 Standard deviation(%) = 0
a. Assuming that the returns are explained by the capital asset pricing model, specify the betas for Publicis and Renault, and the risk of a portfolio of Publicis and Renault with an expected return the same as the CAC 40.
b. Specify the composition of a portfolio consisting of the CAC 40 and the risk-free asset that will produce an expected return of 10%. Contrast the risk on this portfolio with the risk of Renault.