Assume the CAPM is the correct asset pricing model,the risk-free rate of return is 6%,and the market portfolio has an expected return and a standard deviation of 16% and 0.10%,respectively.An investor has a portfolio consisting of asset A,which has a beta of 1.6,and asset B,which has a beta of 0.6.If the investor wishes to earn a return identical to that of the risk-free asset,what weight should the investor place in assets A and B?

A) $ -60 \% $ in asset $ \mathrm{A} $ and $ 160 \% $ in asset $ \mathrm{B} $
B) $ 0 \% $ in asset $ A $ and $ 100 \% $ in asset $ B $
C) $ 20 \% $ in asset $ A $ and $ 800 \% $ in asset $ B $
D) $ 60 \% $ in asset A and $ 40 \% $ in asset B

Question

Assume the CAPM is the correct asset pricing model,the risk-free rate of return is 6%,and the market portfolio has an expected return and a standard deviation of 16% and 0.10%,respectively.An investor has a portfolio consisting of asset A,which has a beta of 1.6,and asset B,which has a beta of 0.6.If the investor wishes to earn a return identical to that of the risk-free asset,what weight should the investor place in assets A and B?

A) $ -60 \% $ in asset $ \mathrm{A} $ and $ 160 \% $ in asset $ \mathrm{B} $
B) $ 0 \% $ in asset $ A $ and $ 100 \% $ in asset $ B $
C) $ 20 \% $ in asset $ A $ and $ 800 \% $ in asset $ B $
D) $ 60 \% $ in asset A and $ 40 \% $ in asset B

Quizplus · Accepted Answer

To earn a return equal to the market portfolio,the portfolio must have the same risk as the risk-free rate ,which can be solved to obtain w_A = -0.6.Hence,w_B = 1.6.

Assume the CAPM Is the Correct Asset Pricing Model,the Risk-Free −60% -60 \% −60%

Assume the CAPM Is the Correct Asset Pricing Model,the Risk-Free $-60 \%$