1. Explain whether or not it represents a diversifiable or an undiversifiable risk. Please consider the issues from the viewpoint of investors. Explain your reasoning.
a. A large fire severely damages three major U.S. cities.
b. A substantial unexpected rise in the price of oil.
traded corporation.
2. Use the CAPM to answer the following questions:
a. Find the Expected Rate of Return on the Market Portfolio
given that the Expected Rate of Return on Asset “i” is 10%, the
Risk-Free Rate is 3%, and the Beta (b) for Asset “i” is 1.5.
b. Find the Risk-Free Rate given that the Expected Rate of
Return on Asset “j” is 14%, the Expected Return on the Market
Portfolio is 12%, and the Beta (b) for Asset “j” is 1.5.
c. What do you think the Beta (β) of your portfolio
would be if you owned half of all the stocks traded on the major exchanges?
Explain.
3) What you think is the main ‘message’ of the Capital Asset
Pricing Model to corporations and what is the main message of the CAPM to
investors?
