Consider a market with only the following three risky assets:
|
|
Expected Return % per month
|
Risk %
|
Covariance with market
|
|
Asset 1
|
2.03
|
2
|
1.12
|
|
Asset 2
|
1.79
|
1
|
0.90
|
|
Asset 3
|
1.49
|
1
|
0.62
|
|
Market Portfolio
|
|
0.92
|
|
a) Consider the market portfolio comprised of 4% invested in Asset 1, 76% invested in Asset 2, and 20% invested in Asset 3. What is the expected return of this portfolio?
b) What are the betas of the three risky assets?
c) Suppose the riskless rate of interest is 0.8% (8/10ths of one percent per month). Are these three securities priced correctly?
d) What is the beta of the market portfolio calculated as a weighted average of the betas of its components?