__Instructions__:

- Answer
**ANY****THREE**questions. - Show all work where required. The final answer carries very little weight in determining your score for each problem.

**Use the following data for questions 1 through 4.**

Data analysis on several securities has revealed the following statistics;

, , , , , and . “F” is a riskless asset.

- (25 points)

- Compute the level of systematic risk for A, , and state whether A is more risky than the market or less risky than the market (or the same). (5 points)

- Use the capital asset pricing model to determine if A is correctly priced. State whether there is an arbitrage opportunity available. If so, what is the amount of Jensen’s Alpha? (5 points)

- Construct an arbitrage portfolio and show the level of return. (15 points)

- (25 points)

- Compute Sharpe’s Index for “A” and for the market portfolio, “M.” Which of the two assets would a risk-averse investor prefer? (10 points)To get assistance on this or any other related assignment, Click here for professional help..

- Compute Treynor’s Index for “A” and the market portfolio, “M.” Which of the two assets would a risk-averse investor prefer? (10 points)

- How does the correlation between A and M explain the difference between the two indexes? (5 points)

- (25 points)

In question #1 the security market line was used to determine whether “A” was under-priced or overpriced. This question uses the capital market line.

- Graph the capital market line in the space below. Hint: You will have to find the slope of the CML in order to do this. (8 points)

- Show whether “A” is correctly priced according to the capital market line. (8 points)

- Explain the difference between the security market line and the capital market line in terms of risk and return. Will the capital market line call for a higher expected return than the security market line? (5 points)To get assistance on this or any other related assignment, Click here for professional help..

- State the three forms of the EMH and describe an anomaly of one of the forms. (4 points)

- Compute the following:

- Compute the expected returns and standard deviations of portfolio P, formed by combining A and M using the weights below. (15 points)

Use the equations,

and

1.0 | ||

0.75 | ||

0.5 | ||

0.25 | ||

0.00 |

- Graph the standard deviation and expected return in the space below. Put standard deviation on the horizontal axis and expected return on the vertical axis. (5 points)
- Would anyone ever invest in M? Explain in the context of risk and return. (5 points)