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Essentials Of Investments
Found in: Page 226
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

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Short Answer

If the simple CAPM is valid, which of the situations in Problems 13 – 19 below are possible? Explain. Consider each situation independently.

The correct answer would be: “Not Possible”

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Step by Step Solution

Definition

The CAPM or the Capital Asset Pricing Model is used to determine the rate of return of an asset by weighing the associated risks and other factors. It is measured in terms of beta and the required rate of return.

Explanation

Portfolio A clearly dominates the market portfolio. It has a lower standard deviation with a higher expected return.

Therefore this is not possible, if the CAPM is valid.

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