Exercise 2

In the second exercise session, we worked with the risk-free asset in the Markowitz framework. We used the capital market line to analyse lending and borrowing at the risk-free rate, and practised calculations involving the market portfolio and tangent portfolio. We also computed beta and expected return from CAPM, and considered CAPM-consistent pricing.

Exercise set:

• Exercise Set 2

Solution set:

• Solution set for Exercise 2

Material used:

• Petters–Dong, Sec. 4.1.1, The Capital Market Line (CML), pp. 153–157; Sec. 4.1.2, Expected Return and Risk of the Market Portfolio, pp. 157–158; Sec. 4.1.3, The Capital Asset Pricing Model (CAPM), pp. 158–163; Sec. 3.3, Efficient Frontier for N Securities with Short Selling, pp. 117–126.

Exercise Set 3 for Thursday 17 September