Assume the CAPM Is the Correct Asset Pricing Model,the Risk-Free $-60 \%$

question 15

Multiple Choice

Assume the CAPM is the correct asset pricing model,the risk-free rate of return is 6%,and the market portfolio has an expected return and a standard deviation of 16% and 0.10%,respectively.An investor has a portfolio consisting of asset A,which has a beta of 1.6,and asset B,which has a beta of 0.6.If the investor wishes to earn a return identical to that of the risk-free asset,what weight should the investor place in assets A and B?

• A) \( -60 \% \) in asset \( \mathrm{A} \) and \( 160 \% \) in asset \( \mathrm{B} \)
• B) \( 0 \% \) in asset \( A \) and \( 100 \% \) in asset \( B \)
• C) \( 20 \% \) in asset \( A \) and \( 800 \% \) in asset \( B \)
• D) \( 60 \% \) in asset A and \( 40 \% \) in asset B

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Definitions:

Standard Deviation

A statistic that quantifies the amount of variation or dispersion of a set of data values.

Normally Distributed

Describes a distribution of data that follows the normal distribution curve, characterized by a bell shape and equal mean, median, and mode.

Life Expectancy

The average period that an organism, especially a human, is expected to live based on demographic factors.

Mean

The arithmetic average of a set of numbers, found by dividing the sum of these numbers by the count of the numbers in the set.