Question

my qustion is Q 8, beta and capm thank you !

Chapter 13 Retum, Risk, and the Security Market Line 5. Expected Portfolio B asset, can the expect the portfolio? Can it be less yes to one or both of d. The directors of Big Widget die in a plane crash. Congress approves changes to the tax code that will increase the top marginal perte tax rate. The legislation had been debated for the previous six months. ted Portfolio Returns (LO1] If a portfolio has a positive investment in every can the expected return on the portfolio be greater than that on every asset in ortfolio? Can it be less than that on every asset in the portfolio? If you answer to one or both of these questions, give an example to support your answer. orsification (LO2] True or false: The most important characteristic in termining the expected return of a well-diversified portfolio is the variance of the individual assets in the portfolio. Explain. Portfolio Risk (LO2] If a portfolio has a positive investment in every asset, can the standard deviation on the portfolio be less than that on every asset in the portfolio? 6. Diversification 7. Portfolio Risk [LO21 What about the portfolio beta? Reta and CAPM (LO4] Is it possible that a risky asset could have a beta of zero? Explain. Based on the CAPM, what is the expected return on such an asset? Is it possible that a risky asset could have a negative beta? What does the CAPM predict about the expected return on such an asset? Can you give an explanation for your answer? 9. Corporate Downsizing (LO1] In recent years, it has been common for companies to experience significant stock price changes in reaction to announcements of mas- sive layoffs. Critics charge that such events encourage companies to fire longtime employees and that Wall Street is cheering them on. Do you agree or disagree? 10. Earnings and Stock Returns [LO1] As indicated by a number of examples in this chapter, earnings announcements by companies are closely followed by, and frequently result in, share price revisions. Two issues should come to mind. First, earnings announcements concern past periods. If the market values stocks based on expectations of the future, why are numbers summarizing past performance relevant? second, these announcements concern accounting earnings. Going back to Chap- - such earnings may have little to do with cash flow-so, again, why are they relevant? QUESTIONS UESTIONS AND PROBLEMS 1. Determining Por folio that has 135 shares ing Portfolio Weights (LO1] What are the portfolio weights for a port- 135 shares of Stock A that sell for $48 per share and 165 shares of 2. Portly tock B that sell for $29 per share Portfolio C ated Roturn ILON nturn ILO11 You own a portfolio that has $2,650 invested in the expected returns on these stocks are on the portfolio?

Answer 1

Ans 8) Yes beta can be zero for the risky asset. If the covariance of the risky asset and risk free asset is zero then the beta will be zero for the risky asset. If beta is zero for the asset then the return will be equal to risk risk free return for that asset as per CAPM model.

Return on risky asset = return on risk free asset + beta * (market return - return on risk free asset)

if beta = 0 then return on risky asset = return of risk free asset.

Yes it's possible that a risk asset can have a negative beta if the covariance is negative between market and risky asset return mostly this type of assets are contrarian bet and performed well when market is doing bad and falling. Return on negative beta asset is less than risk free rate when market is giving positive return and greater than risk free rate when market is giving negative return.