Let us assume a normal distribution of returns and risk


1. Let us assume a normal distribution of returns and risk averse utility functions. Under what conditions will all investors demand the same portfolio of risky assets?

2. The following data have been developed for the Donovan Company, the manufacturer of an advanced line of adhesives:

Sate                       Probability                         Market Return                  Return for the firm

1                              .1                                                            -.15                                        -.30

2                              .3                                                            .05                                          .00                         

3                              .4                                                            .15                                          .20

4                              .2                                                            .20                                          .50

The risk free rate I 6%. Calculate the following:

a) The expected market return.

b) The variance of the market return.

c) The expected return for the Donovan Company.

d) The covariance of the return for the Donovan Company with the market return.

e) Write the equation of the security market line.

f) What is the required return for the Donovan Company? How does this compare with its expected return?

3. What are the assumptions sufficient to guarantee that the market portfolio is an efficient portfolio?

4. In the CAPM is there any way to identify the investors who are more risk averse? Explain. How would you answer change  if there were not a riskless asset?

5. Given risk free borrowing and lending, efficient portfolios have no unsystematic risk. True or False? Explain.

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Finance Basics: Let us assume a normal distribution of returns and risk
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