CAS Exam 9 Spring 2015, Question 4
Study guide: Exam 9
Given the following information:
- The variance-covariance matrix:
| Stock A | Stock B | Market Portfolio | |
|---|---|---|---|
| Stock A | 0.16 | ||
| Stock B | -0.48 | 1.44 | |
| Market Portfolio | -0.0108 | 0.252 | 0.09 |
- Stock A and Stock B are perfectly negatively correlated.
- The risk-free rate is 3%.
- The market portfolio has an expected return of 8%.
- Portfolio P consists of:
- 75% invested in Stock A.
- 25% invested in Stock B.
Part a (1.5 points)
Using CAPM, calculate the expected return of Portfolio P.
Part b (1.25 points)
Construct an arbitrage strategy using the risk-free rate and some combination of Stock A and Stock B.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution