CAS Exam 9 Spring 2017, Question 5
Study guide: Exam 9
Given the following:
| Portfolio | Expected Annual Rate of Return | Beta |
|---|---|---|
| A | 7.8% | 0.4 |
| B | 8.3% | 0.9 |
- The market portfolio has an expected annual rate of return of 10%.
- The risk-free rate is 5%.
Part a (0.5 points)
Calculate the alpha for each of portfolio A and B using the capital asset pricing model (CAPM).
Part b (1 point)
Graph the security market line (SML). Plot the positions of portfolio A, portfolio B, the market portfolio and the risk-free portfolio. Clearly label the axes and the alpha for each of portfolio A and B.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution