Business Finance, Computational and mini essay question

Business Finance, Computational and mini question - Essay Example (i) Determine what proportion of Mrs Sensible's 100,000 should be invested in Curtain plc and Blind plc in order to create a portfolio with a beta coefficient of 1.2. Calculate the expected return of such a portfolio. (iii) Specify a more efficient portfolio with the same return characteristics as the portfolio identified in (i) above, and calculate the beta and total risk characteristics of such a portfolio. Fully explain your answer (b) Given the the Arbitrage Pricing Theory (APT) considers more then one factor when attempting to explain the expected return on a security it is thus a more realistic and superios model to the CAPM. Discuss. The recognition of systematic risk makes an asset less desirable. The Capital Asset Pricing Model or CAPM is useful because it provides an explanation for the magnitude of an asset's risk premium, the difference between an asset's expected return and the risk-free interest rate. Although the CAPM has proved useful in real-world applications, it assumes that there is only one source of systematic risk that is found in the market portfolio. However, an alternative theory, Arbitrage Pricing Theory, takes the view that there are several sources of risking the economy that cannot be eliminated by diversification. Instead of calculating a single beta like CAPM, APT calculates many betas by estimating the sensitivity of an asset's return to changes in each facto