Business, 01.07.2021 20:50, pennygillbert

Suppose that the CAPM holds and correctly priced all assets in the financial market. Consider the following probability distribution of returns on portfolio P and the market portfolio. State of Economy Probability Portfolio P Market
Boom 0.2 15% 10%
Normal 0.6 10% 6%
Bust 0.2 -5% 2%
a. Suppose that another well-diversified portfolio K has a beta of 1.5, and its standard deviation of the error term is zero. What are portfolio K's expected return and Treynor ratio?
b. Based on her risk preference, a rational mean-variance optimizing investor under the CAPM intends to have a target risk (i. e., standard deviation), which is only a half of that of the market portfolio. Determine the expected return for her (complete) portfolio.
c. Stock C has a beta of 0 and a return standard deviation of 6%. What is the minimum return standard deviation of a two-asset portfolio consisting of stock C and the market portfolio?

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