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in BUS 4028F - Financial Economics by (240 points)

 ASSET                                                                   A                          B                       B D E                                  probability    
annual return in





state 1 3% 3% 3% 3% 3% 0.25
state2 5%
7% 2% 8%                                             3% 0.5
state3 7% 5% 8% 1% 3% 0.25
market capitalisation 10m 20m 40m 30m

4 In a market where the CAPM holds there are five assets with the following attributes.  

Asset A B C D E Probability  of being in state Annual return in        State 1 3% 3% 3% 3% 3% 0.25 State 2 5% 7% 2% 8% 3% 0.5 State 3 7% 5% 8% 1% 3% 0.25 Market Capitalisation 10m 20m 40m 30m    


by (4.2k points)

I'm not sure what the question is?

1 Answer

0 votes
by (740 points)
In order to calculate the expected annual return on the market portfolio, you must first calculate the return on each individual asset and then weight the returns, with the weights being equal to the market capitalisation amounts. To calculate the return on each individual asset, you would proceed as follows:

E(X) = Return in state 1 x Probability of state 1 + Return in state 2 x Probability of state 2 + Return in state 3 x Probability of state 3

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