An economy contains these three assets:

Asset A has standard deviation of returns (per annum) of 25% and market capitalisation $600m

Asset B has standard deviation of 20%, market capitalisation $300m

Asset C has standard deviation of 10%, maket capitalisation $100m

The correlation coefficient for the returns on each pair of distinct securities is 0.25.

The risk-free rate of return is 3.3% per annum and the expected return on the market is 8.38% per annum.

The assumptions underlying CAPM are valid and all investors will hold their portfolios for the next year.

How can I calculate the expected annual returns for each asset?


closed as off-topic by Alex C, amsh, lehalle, olaker Apr 29 '16 at 11:47

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  • "Basic financial questions are off-topic as they are assumed to be common knowledge for those studying or working in the field of quantitative finance." – Alex C, amsh, lehalle, olaker
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  • 5
    $\begingroup$ This is too basic to discuss here. My hints: (1) What are the weights of the market portfolio? (2) What is the covariance matrix? Piece it together from the scattered info they give you. (3) Find the equilibrium returns from (1) and (2), using "inverse portfolio optimization". $\endgroup$ – Alex C Apr 3 '16 at 11:53