Consider the following year-end prices of a hypothetical market index:

QUESTION

Consider the following year-end prices of a hypothetical market index:YearPrice200410020051102006104.52007106.592008106.592009110.852010108.63(a) Compute the expected (annual) return of the market index as the arithmetic average of the annual returns of the market index.Assume that the risk-free rate equals 0.75% and use the above market index as the Market Portfolio.(b) Assuming that the CAPM holds, what is the expected return of asset A whose beta equals 0.8?(c) Again assuming that the CAPM holds, what is the expected return of asset B whose beta equals 3?(d) What, according to the CAPM, is the beta of an asset C whose expected return equals 0.75%(that is, risk-free rate in this problems)?
(a) The annual returns of the market index are as follows:

e, the expected return of the market index is

ANSWER:

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