1. Assuming the expected market rate of return is 16% and the rate on T-bills is 5%.
Using the CAPM calculate the following:
a. The market risk premium.
b. The slope of the Security Market Line.
c. The required rate of return on stock (A) with a beta of 0.8
d. The required rate of return on stock (B) with a beta of 2.20
2. There is a portfolio whose current value is $2 million. Its daily return is normally distributed with a mean of 2% and a standard deviation of 0.7.
a. Compute the daily 99% and 95% VaRs of a portfolio
b. Interpret the results.