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Question 17.11: How should an investor construct an efficient portfolio in t...

How should an investor construct an efficient portfolio in the presence of a risk-free asset?

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An efficient portfolio in the presence of a risk free asset is formed by combining an investment in the market portfolio with either an investment in the risk-free asset or borrowing at the risk-free rate.

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Suppose the risk-free asset’s rate of return is 2% and you forecast a return on the market portfolio of 8%. If the beta for some asset x is 1.2, what is the expected return on asset x?

Verified Answer:
E\left(R_{i}\right)=R_{f}+\beta_{i}\left(E\...

Indicate why you agree or disagree with the following statements: a. “As a percentage of the total risk, the unsystematic risk of a diversified portfolio is greater than that of an individual asset.” b. “An investor should be compensated for accepting unsystematic risk.”

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a. Disagree: Unsystematic risk is nearly eliminate...

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What are the difficulties of applying the arbitrage pricing theory model in practice?

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What are the advantages of the APT model relative to the CAPM?

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What are the fundamental principles underlying the APT model?

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The fundamental principles of the APT model are th...

What is meant by the law of one price, and what does it imply about a package of securities and a given security that have the same payoff?

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What is meant by the “homogeneous assumption” in the CAPM?

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Why is the CAPM’s assumption that investors can borrow and lend at the risk-free rate questionable?

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What is the theoretical problem inherent in verifying the CAPM empirically?

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