CAS Exam 9 Spring 2017, Question 6
Study guide: Exam 9
Given the following:
| Stock | Current Price (time=0) | Investors' Forecast Price (time=1) | Beta | Covariance with Market Portfolio |
|---|---|---|---|---|
| A | 80 | 85 | 0.2 | Not given |
| B | 60 | 63 | Not given | 0.03 |
- The market risk premium is 6%.
- The market variance is 5%.
- The risk-free rate is 4%.
Part a (1.5 points)
Explain which stock is the superior investment strategy according to the capital asset pricing model (CAPM).
Part b (1 point)
Compare and contrast CAPM and the single-index model with respect to the optimal risky portfolio.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution