Assume the CAPM Is the Correct Asset Pricing Model,the Risk-Free $-200 \%$

question 30

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 0.6,and asset B,which has a beta of 0.8.If the investor wishes to earn a return identical to that of the market portfolio,what weight should the investor place in assets A and B?

• A) \( -200 \% \) in asset \( A \) and \( 300 \% \) in asset \( B \)
• B) \( -100 \% \) in asset \( A \) and \( 200 \% \) in asset \( B \)
• C) \( 20 \% \) in asset A and \( 80 \% \) in asset B
• D) \( 40 \% \) in asset \( A \) and \( 60 \% \) in asset B

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Definitions:

Profitability Index

A capital budgeting tool used to measure the relative profitability of an investment, calculated by dividing the present value of future cash flows by the initial investment cost.

Accounting Rate

The accounting rate, or rate of return, measures the profitability of investments or projects, expressed as a percentage.

Discounted Cash Flows

A valuation method used to estimate the value of an investment based on its expected future cash flows, adjusted for time value of money.

Initial Cost

Typically refers to the acquisition price of an asset or investment, including all expenses incurred to bring it to its intended use.