Suppose there are only three risky assets, IAM stock, IBM stock, and ICM stock

Suppose there are only three risky assets, IAM stock, IBM stock, and ICM stock. The total market equity values of these companies at current prices are $150 million for IAM, $300 million for IBM, and $1,500 million for ICM. In addition there is $50 million of riskless bonds in the market. The proportion of the riskless asset held in the aggregate market portfolio would be?


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Challenge Problem: Consider a market with only the following three risky assets

Challenge Problem: Consider a market with only the following three risky assets:

Expected Return % per month Risk % Covariance with market
Asset 1 2.03 2 1.12
Asset 2 1.79 1 0.90
Asset 3 1.49 1 0.62
Market Portfolio 0.92

a) Consider the market portfolio comprised of 4% invested in Asset 1, 76% invested in Asset 2, and 20% invested in Asset 3. What is the expected return of this portfolio?
b) What are the betas of the three risky assets?
c) Suppose the riskless rate of interest is 0.8% (8/10ths of one percent per month). Are these three securities priced correctly?
d) What is the beta of the market portfolio calculated as a weighted average of the betas of its components?


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