**25_The Capital Asset Pricing Model**

**The Capital Asset Pricing Model**

**1. For each of the scenarios below, explain whether or not it represents a diversifiable or an undiversifiable risk. Please consider the issues from the viewpoint of investors. Explain your reasoning**

**a. A large fire severely damages three major U.S. cities.**

**b. A substantial unexpected rise in the price of oil.**

**c. A major lawsuit is filed against one large publicly traded corporation.**

**2. Use the CAPM to answer the following questions:**

**a. Find the Expected Rate of Return on the Market Portfolio given that the Expected Rate of Return on Asset "i" is 10%, the Risk-Free Rate is 3%, and the Beta (b) for Asset "i" is 1.5. **

**b. Find the Risk-Free Rate given that the Expected Rate of Return on Asset "j" is 14%, the Expected Return on the Market Portfolio is 12%, and the Beta (b) for Asset "j" is 1.5.**

**c. What do you think the Beta (β) of your portfolio would be if you owned half of all the stocks traded on the major exchanges? Explain.**

**3. In one page explain what you think is the main 'message' of the Capital Asset Pricing Model to corporations and what is the main message of the CAPM to investors?**

**two-page report. Please show your work for quantitative questions and references**

**Category:**Business, General Business

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