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    Computing Beta and Risk Premium

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    I. Compute the expected return and the volatility of return of a portfolio that has a portfolio share of 0.9 in the S&P 500 and 0.1 in an emerging market index. The S&P 500 has a volatility of return of 15 percent and an expected return of 12 percent. The emerging market has a return volatility of 30 percent and an expected return of 10 percent. The correlation between the emerging market index return and the S&P 500 is 0.1.

    II. If the S&P 500 is a good proxy for the market portfolio in the CAPM, and the CAPM applies to the emerging market index, use the information in question I to compute the beta and risk premium for the emerging market index.

    III. Compute the beta of the portfolio described in question II with respect to the S&P 500.

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    Solution Preview

    I. Compute the expected return and the volatility of return of a portfolio that has a portfolio share of 0.9 in the S&P 500 and 0.1 in an emerging market index. The S&P 500 has a volatility of return of 15 percent and an expect¬ed return of 12 percent. The emerging market has a return volatility of 30 percent and an expected return of 10 percent. The correlation ...

    Solution Summary

    This solution provides step by step calculations for computing beta and risk premium for market portfolios.

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